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Financial Development and Monetary Policy Efficiency

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  • Stefan Krause
  • Felix Rioja

Abstract

We study how financial development is related to short run stabilization. Specifically, our objective is to derive monetary policy efficiency measures (PEMs) for 37 industrialized and developing countries and analyze the impact that the size and depth of the banking sector and the capital sector have on policy performance. It is our contention that a more developed financial sector increases the scope of action of policy, resulting in improved policy performance. In our empirical analysis we use three financial development measures: private credit, liquid liabilities, and a financial aggregate index that comprises banking and stock market measures. Our findings suggest that more developed financial markets, controlling for central bank independence, and inflation targeting and membership to the Economic and European Monetary Union significantly contribute to explaining a more efficient monetary policy implementation.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0613.

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Date of creation: Sep 2006
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Handle: RePEc:emo:wp2003:0613

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Cited by:
  1. International Monetary Fund, 2008. "Is Monetary Policy Effective When Credit is Low?," IMF Working Papers 08/288, International Monetary Fund.
  2. Marc-André Gosselin, 2007. "Central Bank Performance under Inflation Targeting," Working Papers 07-18, Bank of Canada.
  3. Uluc Aysun & Ryan Brady & Adam Honig, 2011. "Financial Frictions and the Credit Channel of Monetary Transmission," Working Papers 2011-03, University of Central Florida, Department of Economics.
  4. Bank for International Settlements, 2009. "Communication of monetary policy decisions by central banks: what is revealed and why," BIS Papers, Bank for International Settlements, number 47, 8.

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