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Monetary Policy in Low Income Countries in the Face of the Global Crisis

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Author Info

  • Jaromir Benes
  • Andrew Berg
  • Rafael Portillo
  • Mai Dao
  • Alfredo Baldini

Abstract

We develop a DSGE model with a banking sector to analyze the impact of the financial crisis on Zambia and the role of the monetary policy response. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. We characterize monetary policy as "stop and go": initially tight, subsequently loose. Simulations of the model broadly match the path of the economy during this period. We find that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. We study the factors driving the "stop" part of policy and derive policy implications for central banks in low-income countries.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/94.

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Length: 47
Date of creation: 01 Apr 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/94

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Related research

Keywords: Banking sector; Economic models; Low-income developing countries; Risk premium; Monetary policy; inflation; terms of trade; aggregate demand; money growth; monetary economics; central bank; monetary authority; terms of trade shock; inflation target; money demand; monetary aggregates; monetary transmission; monetary fund; nominal variables; foreign exchange; foreign currency; inflation targeting; inflation rate; inflationary pressures; monetary base; monetary authorities; government securities; real money; monetary transmission mechanism; monetary policy rules; high inflation; wage inflation; monetary policy frameworks; loose monetary policy; inflationary expectations; monetary determinants; monetary policy rule; liquidity ratio; monetary shock; inflation dynamics; real variables; inflation ? targeting regime; nominal interest rate; monetary stance; real wages; money balances; monetary policy regime; relative prices; chronic inflation; increase in interest rates; demand for money; optimal monetary policy; open market operations; economic instability; monetary policy framework; macroeconomic analysis; inflation targeting regime; inflation ? targeting;

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References

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  1. Vasco Cúrdia & Michael Woodford, 2009. "Credit frictions and optimal monetary policy," BIS Working Papers 278, Bank for International Settlements.
  2. Enrique G. Mendoza, 2006. "Lessons from the Debt-Deflation Theory of Sudden Stops," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 411-416, May.
  3. Douglas Laxton & Susanna Mursula & Michael Kumhof & Dirk Muir, 2010. "The Global Integrated Monetary and Fiscal Model (GIMF)," IMF Working Papers 10/34, International Monetary Fund.
  4. Alfredo Baldini & Marcos Poplawski-Ribeiro, 2011. "Fiscal and Monetary Determinants of Inflation in Low-Income Countries: Theory and Evidence from Sub-Saharan Africa-super- †," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 20(3), pages 419-462, June.
  5. Guillermo A. Calvo & Alejandro Izquierdo & Ernesto Talvi, 2006. "Sudden Stops and Phoenix Miracles in Emerging Markets," American Economic Review, American Economic Association, American Economic Association, vol. 96(2), pages 405-410, May.
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Cited by:
  1. Michal Andrle & Andrew Berg & R. Armando Morales & Rafael Portillo & Jan Vlcek, 2013. "Forecasting and Monetary Policy Analysis in Low-Income Countries," IMF Working Papers 13/61, International Monetary Fund.
  2. Robert Blotevogel, 2013. "Measuring and Mending Monetary Policy Effectiveness Under Capital Account Restrictions," IMF Working Papers 13/77, International Monetary Fund.

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