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Monetary Transmission in an Emerging Targeter

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Author Info

  • A. R. Pagan
  • Douglas Laxton
  • Luis Catão

Abstract

This paper lays out a structural model that incorporates key features of monetary transmission in typical emerging-market economies, including a bank-credit channel and the role of external debt accumulation on country risk premia and exchange rate dynamics. We use an SVAR representation of the model to study the monetary transmission in Brazil. We find that interest rate changes have swifter effects on output and inflation compared to advanced economies and that exchange rate dynamics plays a key role in this connection. Importantly, the response of inflation to monetary policy shocks has grown stronger and the output-inflation tradeoff improved since the introduction of inflation targeting.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/191.

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Length: 42
Date of creation: 01 Aug 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/191

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Related research

Keywords: Inflation targeting; Emerging markets; Bank credit; Interest rates; Developed countries; Economic models; Disinflation; inflation; monetary policy; central bank; monetary transmission; real interest rate; inflation equation; terms of trade; monetary transmission mechanism; monetary economics; low inflation; aggregate demand; inflation rate; monetary fund; foreign currency; nominal interest rates; monetary policy reaction function; monetary shocks; nominal interest rate; price level; inflation target; reserve requirements; inflation dynamics; relative price; monetary policy transmission mechanism; real rate of interest; inflation-targeting; monetary regimes; inflation rates; high inflation; monetary analysis; monetary stance; rise in inflation; price stability; moderate ? inflation; real rates; fall in inflation; monetary transmission process; relative prices; monetary policy frameworks; annual inflation; monetary shock; reduction in inflation; minimum reserve requirements; money market; real interest rates;

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References

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  1. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
  2. Ondra Kamenik & Heesun Kiem & Vladimir Klyuev & Douglas Laxton, 2013. "Why Is Canada's Price Level So Predictable?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 45(1), pages 71-85, 02.
  3. Chin Nam Low & Heather Anderson & Ralph Snyder, 2004. "Single Source of Error State Space Approach to the Beveridge Nelson Decomposition," Econometric Society 2004 Australasian Meetings, Econometric Society 242, Econometric Society.
  4. André Minella, 2003. "Monetary Policy and Inflation in Brazil (1975-2000): A VAR Estimation," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 57(3), pages 605-635, July.
  5. Martins, Betina Guimarães Dodsworth & Pinto, Rodrigo Ribeiro Antunes & Bonomo, Marco Antônio Cesar, 2004. "Debt composition and exchange rate balance sheet effects in Brazil: A firm level analysis," Economics Working Papers (Ensaios Economicos da EPGE) 535, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  6. Ignazio Angeloni & Anil K. Kashyap & Benoît Mojon & Daniele Terlizzese, 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and United States," Proceedings, Federal Reserve Bank of Cleveland, Federal Reserve Bank of Cleveland, pages 1265-1317.
  7. Guillermo A. Calvo & Alejandro Izquierdo & Luis-Fernando Mejia, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," NBER Working Papers 10520, National Bureau of Economic Research, Inc.
  8. Sebastian Edwards & Carlos A. Végh, 1997. "Banks and Macroeconomic Disturbances Under Predetermined Exchange Rates," CEMA Working Papers: Serie Documentos de Trabajo., Universidad del CEMA 115, Universidad del CEMA.
  9. José De Gregorio & Andrea Tokman & Rodrigo Valdés, 2005. "Flexible Exchange Rate with Inflation Targeting in Chile: Experience and Issues," Research Department Publications, Inter-American Development Bank, Research Department 4427, Inter-American Development Bank, Research Department.
  10. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: Lessons from the Chilean Experience," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 8(3), pages 545-575, December.
  11. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2003. "Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility," Working Papers Series, Central Bank of Brazil, Research Department 77, Central Bank of Brazil, Research Department.
  12. Afonso S Bevilaqua & Mário Mesquita & André Minella, 2008. "Brazil: taming inflation expectations," BIS Papers chapters, Bank for International Settlements, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 139-158 Bank for International Settlements.
  13. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Closing Small Open Economy Models," NBER Working Papers 9270, National Bureau of Economic Research, Inc.
  14. Favero, Carlo A & Giavazzi, Francesco, 2004. "Inflation Targeting and Debt: Lessons from Brazil," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4376, C.E.P.R. Discussion Papers.
  15. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  16. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  17. Marco Terrones & Luis Catão, 2001. "Fiscal Deficits and Inflation," IMF Working Papers 01/74, International Monetary Fund.
  18. Marvin Goodfriend & Bennett T. McCallum, 2007. "Banking and interest rates in monetary policy analysis: a quantitative exploration," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  19. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, American Economic Association, vol. 78(2), pages 435-39, May.
  20. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series, Central Bank of Brazil, Research Department 109, Central Bank of Brazil, Research Department.
  21. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1989, C.E.P.R. Discussion Papers.
  22. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series, Central Bank of Brazil, Research Department 76, Central Bank of Brazil, Research Department.
  23. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
  24. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
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Citations

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Cited by:
  1. Annabelle Mourougane, 2011. "Refining Macroeconomic Policies to Sustain Growth in Brazil," OECD Economics Department Working Papers 899, OECD Publishing.
  2. Luis A.V. Catão & Adrian Pagan, 2011. "The Credit Channel and Monetary Transmission in Brazil and Chile: A Structured VAR Approach," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 5, pages 105-144 Central Bank of Chile.
  3. Eduardo Fernández-Arias & Andrew Powell & Alessandro Rebucci, 2009. "The Multilateral Response to the Global Crisis: Rationale, Modalities, and Feasibility," IDB Publications 6770, Inter-American Development Bank.
  4. Oscar Parkyn & Tugrul Vehbi, 2013. "The Effects of Fiscal Policy in New Zealand: Evidence from a VAR Model with Debt Constraints," Treasury Working Paper Series 13/02, New Zealand Treasury.

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