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Transmission Mechanisms of Monetary Policy in Armenia

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  • Era Dabla-Norris
  • Holger Floerkemeier
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    Abstract

    This paper examines monetary policy transmission in Armenia in light of the authorities'' intention to shift to an inflation-targeting regime over the medium term. We find that the capability of monetary policy to influence economic activity and inflation is still limited, as important channels of monetary transmission are not fully functional. In particular, the interest rate channel remains weak, even though there is some evidence of transmission to prices of changes in the repo rate, the central bank''s new operating target for inflation. As in other emerging and transition economies with a high degree of dollarization, the exchange rate channel has a strong impact on the inflation rate. Moreover, we find that inflation does respond to broad money shocks, once foreign currency deposits are included.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/248.

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    Length: 27
    Date of creation: 01 Nov 2006
    Date of revision:
    Handle: RePEc:imf:imfwpa:06/248

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    Keywords: Prices; monetary policy; inflation; aggregate demand; monetary transmission; monetary aggregate; foreign currency; monetary transmission mechanism; money supply; foreign exchange; monetary aggregates; central bank; monetary fund; transmission of monetary policy; inflation targeting; price level; inflation-targeting; monetary policy framework; money growth; monetary economics; monetary shock; real interest rate; reserve requirements; nominal interest rate; monetary policy transmission mechanisms; inflationary expectations; money demand; cost of credit; general price level; monetary shocks; monetary targets; average inflation; inflation forecasts; monetary instruments; high inflation; monetary policy transmission mechanism; monetary factors; monetary policy instruments; expansionary monetary policy; contractionary monetary policy; monetary policy regime; real output; financial stability; monetary measures; liquidity management; neutrality of money; real interest rates; monetary policy implementation; inflation rate;

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    References

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    1. Georgy Ganev & Krisztina Molnar & Krzysztof Rybinski & Przemyslaw Wozniak, 2002. "Transmission Mechanism of Monetary Policy in Centraland Eastern Europe," CASE Network Reports 0052, CASE-Center for Social and Economic Research.
    2. Atish R. Ghosh, 1996. "The Output-Inflation Nexus in Ukraine," IMF Working Papers 96/46, International Monetary Fund.
    3. Leonardo Leiderman & Rodolfo Maino & Eric Parrado, 2006. "Inflation Targeting in Dollarized Economies," IMF Working Papers 06/157, International Monetary Fund.
    4. Oomes, Nienke & Ohnsorge, Franziska, 2005. "Money demand and inflation in dollarized economies: The case of Russia," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 462-483, September.
    5. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
    6. 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.
    7. Jérôme Héricourt, 2005. "Monetary policy transmission in the CEECs : revisited results using alternative econometrics," Cahiers de la Maison des Sciences Economiques bla05020, Université Panthéon-Sorbonne (Paris 1).
    8. Bogdan Lissovolik, 2003. "Determinants of Inflation in a Transition Economy," IMF Working Papers 03/126, International Monetary Fund.
    9. Bayoumi, Tamim & Morsink, James, 2000. "A Peek Inside The Black Box: The Monetary Transmission Mechanism In Japan," CEPR Discussion Papers 2435, C.E.P.R. Discussion Papers.
    10. DeJong, David N., 1992. "Co-integration and trend-stationarity in macroeconomic time series : Evidence from the likelihood function," Journal of Econometrics, Elsevier, vol. 52(3), pages 347-370, June.
    11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
    12. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    13. Ben S. Bernanke & Michael Woodford, 1997. "Inflation forecasts and monetary policy," Proceedings, Federal Reserve Bank of Cleveland, pages 653-686.
    14. Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
    15. Blanchard, Olivier Jean, 1989. "A Traditional Interpretation of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 79(5), pages 1146-64, December.
    16. Friedman, Benjamin M & Kuttner, Kenneth N, 1992. "Money, Income, Prices, and Interest Rates," American Economic Review, American Economic Association, vol. 82(3), pages 472-92, June.
    17. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
    18. Franziska Ohnsorge & Nienke Oomes, 2005. "Money Demand and Inflation in Dollarized Economies," IMF Working Papers 05/144, International Monetary Fund.
    19. Armine Khachatryan & David A. Grigorian & Grigor Sargsyan, 2004. "Exchange Rate, Money, and Wages," IMF Working Papers 04/229, International Monetary Fund.
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    Citations

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    Cited by:
    1. Mishra, Prachi & Montiel, Peter, 2013. "How effective is monetary transmission in low-income countries? A survey of the empirical evidence," Economic Systems, Elsevier, vol. 37(2), pages 187-216.
    2. Svetlana Vtyurina & Fahad Alturki, 2010. "Inflation in Tajikistan," IMF Working Papers 10/17, International Monetary Fund.
    3. Sheikh Khurram Fazal & Muhammad Abdus Salam, 2013. "Interest Rate Pass-Through: Empirical Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(1), pages 39-62, Jan-June.
    4. Ogawa, Eiji & Iwatsubo, Kentaro, 2009. "External adjustments and coordinated exchange rate policy in Asia," Journal of Asian Economics, Elsevier, vol. 20(3), pages 225-239, May.
    5. Giorgi Bakradze & Andreas Billmeier, 2007. "Inflation Targeting in Georgia," IMF Working Papers 07/193, International Monetary Fund.
    6. Ara Stepanyan & Era Dabla-Norris & Ashot Anatolii Mkrtchyan, 2009. "A New Keynesian Model of the Armenian Economy," IMF Working Papers 09/66, International Monetary Fund.

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