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Monetary Transmission in Dollarized and Non-Dollarized Economies

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  • International Monetary Fund

Abstract

The paper conducts a comparative study of the monetary policy transmission in two economies that run a well-established IT regime, Chile and New Zealand, vis-Ã -vis two economies operating under relatively newer IT regimes, and which are exposed to a significant degree of dollarization, Peru and Uruguay. It is shown that the traditional interest rate channel is effective in Chile and New Zealand. For Peru and Uruguay, the exchange rate channel is instead more relevant in the transmission of monetary policy. This latter result follows from the limited impact of the policy rate in curbing inflationary pressures in these two countries, in combination with the fact that they have a relatively large and persistent exchange rate pass through. Finally, it is shown that the on-going de-dollarization process of Peru and Uruguay has somewhat strengthened their monetary transmission through the interest rate channel.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/87.

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Length: 21
Date of creation: 01 Apr 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/87

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Related research

Keywords: Dollarization; Economic models; Exchange rates; Inflation targeting; Interest rates; Monetary transmission mechanism; inflation; monetary policy; central bank; money market; aggregate demand; transmission of monetary policy; foreign currency; monetary transmission; inflation target; inflationary pressures; monetary fund; inflation rate; inflation response; monetary authority; monetary policy decisions; contractionary monetary policy; actual inflation; monetary aggregates; monetary economics; average inflation rate; monetary arrangement; monetary policy instrument; monetary instrument; monetary policy transmission mechanism; average inflation; foreign exchange; inflation targeting regime;

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References

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  1. Leonardo Leiderman & Rodolfo Maino & Eric Parrado, 2006. "Inflation Targeting in Dollarized Economies," Working Papers Central Bank of Chile 368, Central Bank of Chile.
  2. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
  3. Peter Montiel & Antonio Spilimbergo & Prachi Mishra, 2010. "Monetary Transmission in Low Income Countries," IMF Working Papers 10/223, International Monetary Fund.
  4. Rossini, Renzo & Vega, Marco, 2007. "El mecanismo de transmisión de la política monetaria en un entorno de dolarización financiera: El caso del Perú entre 1996 y 2006," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 14, pages 11-32.
  5. Peersman, Gert & Smets, Frank, 2001. "The monetary transmission mechanism in the euro area: more evidence from VAR analysis," Working Paper Series 0091, European Central Bank.
  6. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
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Cited by:
  1. International Monetary Fund, 2011. "The Policy Interest-Rate Pass-Through in Central America," IMF Working Papers 11/240, International Monetary Fund.
  2. Khundrakpam, Jeevan Kumar & Jain, Rajeev, 2012. "Monetary Policy Transmission in India: A Peep Inside the Black Box," MPRA Paper 50903, University Library of Munich, Germany.
  3. Jamilov, Rustam, 2012. "Channels of Monetary Transmission in the CIS," MPRA Paper 39568, University Library of Munich, Germany.

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