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How Effective Is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence

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  • Mishra, Prachi
  • Montiel, Peter J
  • Spilimbergo, Antonio

Abstract

This paper surveys the evidence on the effectiveness of monetary transmission in developing countries. We summarize the arguments for expecting the bank lending channel to be the dominant means of monetary transmission in such countries, and present a simple model that suggests why this channel may be both weak and unreliable under the conditions that usually characterize those economies. Next, we review the empirical methodologies that have been employed in the recent literature to assess monetary policy effectiveness, both in developing countries as well as in industrial and emerging economies, essentially based on vector autoregressions (VARs). It is very hard to come away from this review of the evidence with much confidence in the strength of monetary transmission in developing countries. We distinguish between the 'facts on the ground' and 'methodological deficiencies' interpretations of the absence of evidence for strong monetary transmission. We suspect, however, that 'facts on the ground' are indeed an important part of the story. The fact that a wide range of empirical approaches have failed to yield evidence of effective monetary transmission in developing countries, and that the strongest evidence for effective monetary transmission has arisen for relatively prosperous and more institutionally-developed countries such as some central and Eastern European transition economies (at least in the later stages of their transition) and Tunisia, makes us doubt whether methodological shortcomings are the whole story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8577.

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Date of creation: Sep 2011
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Handle: RePEc:cpr:ceprdp:8577

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Keywords: developing countries; exchange rate; institutions; monetary policy;

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  1. Balázs �gert & Ronald MacDonald, 2009. "Monetary Transmission Mechanism In Central And Eastern Europe: Surveying The Surveyable," Journal of Economic Surveys, Wiley Blackwell, vol. 23(2), pages 277-327, 04.
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  3. Claudia Kwapil & Johann Scharler, 2006. "Limited Pass-Through from Policy to Retail Interest Rates: Empirical Evidence and Macroeconomic Implications," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 26–36.
  4. Carlyn Ramlogan, 2004. "The transmission mechanism of monetary policy: Evidence from the Caribbean," Journal of Economic Studies, Emerald Group Publishing, vol. 31(5), pages 435-447, October.
  5. Matousek, Roman & Sarantis, Nicholas, 2009. "The bank lending channel and monetary transmission in Central and Eastern European countries," Journal of Comparative Economics, Elsevier, vol. 37(2), pages 321-334, June.
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  7. Harold Ngalawa & Nicola Viegi, 2011. "Dynamic Effects Of Monetary Policy Shocks In Malawi," South African Journal of Economics, Economic Society of South Africa, vol. 79(3), pages 224-250, 09.
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  10. Al-Mashat Rania & Billmeier Andreas, 2008. "The Monetary Transmission Mechanism in Egypt," Review of Middle East Economics and Finance, De Gruyter, vol. 4(3), pages 32-82, September.
  11. Ewa Wrobel & Tomasz Lyziak & Jan Przystupa, 2008. "Monetary Policy Transmission in Poland: a Study of the Importance of Interest Rate and Credit Channels," SUERF Studies, SUERF - The European Money and Finance Forum, number 2008/1 edited by Morten Balling.
  12. Adam Elbourne & Jakob de Haan, 2009. "Modeling Monetary Policy Transmission in Acceding Countries: Vector Autoregression Versus Structural Vector Autoregression," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 45(2), pages 4-20, March.
  13. Konstantins Benkovskis, 2008. "Is there a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data," Working Papers 2008/01, Latvijas Banka.
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