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Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

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  • Sanchita Mukherjee
  • Rina Bhattacharya

Abstract

In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/229.

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Length: 27
Date of creation: 01 Oct 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/229

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Keywords: Inflation targeting; Private consumption; Private investment; Monetary policy; Banks; Emerging markets; Interest rates; capital account; deposit rate; financial sector; stock market; domestic financial sector; real interest rate; investment function; financial market; substitution effect; aggregate demand; consumption function; stock market liberalization; financial liberalization; financial markets; government spending; financial assets; stock markets; financial market development; deposit interest; stock market development; consumption equation; financial sector development; bonds; consumption behavior; investment demand; investment spending; financial systems; stock market developments; consumption increases; stock market capitalization; reserve requirements; the marginal propensity to consume; domestic financial markets; current investment; financial instability; financial deregulation; consumption expenditures; marginal propensity to consume; consumer spending; deposit money; treasury bonds; consumption growth; stock market turnover; moral hazard; consumption functions; equity capital; financial economics; household consumption; financial instruments; deposit rates; money market rate; deposit interest rates; lifetime income; flexible exchange rate; international finance; money market; financial services;

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References

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  1. Ben Naceur, Samy & Ghazouani, Samir & Omran, Mohammed, 2008. "Does stock market liberalization spur financial and economic development in the MENA region?," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 673-693, December.
  2. Robert M. Townsend & Kenichi Ueda, 2010. "Welfare Gains From Financial Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 553-597, 08.
  3. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
  4. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," Journal of Economic Perspectives, American Economic Association, vol. 12(4), pages 9-30, Fall.
  5. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  6. Mustapha Kamel Nabli, 2007. "Breaking the Barriers to Higher Economic Growth : Better Governance and Deeper Reforms in the Middle East and North Africa," World Bank Publications, The World Bank, number 6914, October.
  7. Reinhart, Carmen & Tokatlidis, Ioannis, 2000. "Financial Liberalization: The African Experience," MPRA Paper 13423, University Library of Munich, Germany.
  8. Reinhart, Carmen & Ostry, Jonathan, 1995. "Saving and real interest rates in developing countries," MPRA Paper 13352, University Library of Munich, Germany.
  9. Lahcen ACHY, 2004. "Financial liberalization, saving, investment and growth in MENA countries," Finance 0411004, EconWPA.
  10. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
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Cited by:
  1. Taha Bahadir Sarac & OkYAY Ucan, 2013. "The Interest Rate Channel in Turkey: An Investigation with Kalman Filter Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 874 - 884.
  2. Jamilov, Rustam, 2012. "Channels of Monetary Transmission in the CIS," MPRA Paper 39568, University Library of Munich, Germany.

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