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Is Monetary Policy Effective When Credit is Low?

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Author Info
Ana Carolina Saizar
Nigel Andrew Chalk
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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/288.

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

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Keywords: Monetary policy ; Credit ; Interest rates ; Inflation ; Flexible exchange rates ; Economic models ;

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