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Is Monetary Policy Effective When Credit is Low?

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    Abstract

    Monetary policy, at least in part, operates through both an interest rate and credit channel. The question arises, therefore, whether monetary policy is a less potent a device in affecting output and inflation in countries that have low levels of credit and where investment and consumption are not financed by borrowing in local currency. This paper employs a Panel Vector Auto Regression approach to examine the empirical evidence in a broad sample of emerging market countries. The data suggests that the effectiveness of changes in policy interest rates in influencing the path of inflation appear to be unrelated to the level of credit and that, instead, the willingness to allow exchange rate flexibility is a far more important determining factor.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/288.

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    Length: 17
    Date of creation: 01 Dec 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/288

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    Related research

    Keywords: Bank credit; Interest rates; Flexible exchange rates; Economic models; inflation; monetary policy; price inflation; monetary transmission; monetary transmission mechanism; central bank; monetary fund; monetary policy regimes; increase in interest rates; monetary aggregates; money supply; monetary economics; aggregate demand; monetary aggregate; national bank; high inflations; optimal ? monetary policy; money market interest rates; monetary authority; money markets; macroeconomic stability; inflation target; monetary authorities; domestic monetary policy; money market; rate of inflation;

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    20. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
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    Cited by:
    1. Tas, Bedri Kamil Onur, 2011. "An explanation for the price puzzle: Asymmetric information and expectation dynamics," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 259-275, June.
    2. Santiago Acosta-O. & David Coble, 2013. "The Interest rate and Exchange Rate Channels in Dollarized and non-dollarized Economies: The Eases of Chile, New Zealand, Peru and Uruguay," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(1), pages 04-23, April.

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