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Measuring and Mending Monetary Policy Effectiveness Under Capital Account Restrictions

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  • Robert Blotevogel
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    Abstract

    I propose a new approach to identifying exogenous monetary policy shocks in low-income countries with capital account restrictions. In the case of Mauritania, a domestic repatriation requirement is the key institutional characteristic that allows me to establish exogeneity. Unlike in advanced countries, I find no evidence for a statistically significant impact of exogenous monetary policy shocks on bank lending. Using a unique bank-level dataset on monthly balance sheets of six Mauritanian banks over the period 2006–11, I estimate structural vector autoregressions and two-stage least square panel models to demonstrate the ineffectiveness of monetary policy. Finally, I discuss how a reduction in banks’ loan concentration ratios and improvements in the liquidity management framework could make monetary stimuli more effective.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/77.

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    Length: 35
    Date of creation: 27 Mar 2013
    Date of revision:
    Handle: RePEc:imf:imfwpa:13/77

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    Keywords: Monetary policy; Mauritania; Banking sector; Capital account; Low-income developing countries; bank lending; central bank; bank reserves; foreign exchange; monetary transmission; monetary policy framework; monetary fund; monetary transmission mechanism; excess liquidity; interbank market; reserve requirement; bank liquidity; money demand; reserve ratio; var model; monetary economics; monetary policy transmission mechanism; monetary injections; monetary shock; banks � loan; monetary shocks; banking supervision; domestic money market; domestic liquidity; monetary stance; banking system; banking market; banking supervisor; banks � liabilities; monetary expansions; open market operations; monetary policy implementation; bank credit;

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    1. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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    3. Chinn,M.D. & Ito,H., 2005. "What matters for financial development? : capital controls, institutions, and interactions," Working papers 4, Wisconsin Madison - Social Systems.
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    7. Tarron Khemraj, 2010. "What does excess bank liquidity say about the loan market in Less Developed Countries?," Oxford Economic Papers, Oxford University Press, vol. 62(1), pages 86-113, January.
    8. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    9. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
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    11. Hauner, David, 2009. "Public debt and financial development," Journal of Development Economics, Elsevier, vol. 88(1), pages 171-183, January.
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    13. Hamid Reza Davoodi & S. V. S. Dixit & Gabor Pinter, 2013. "Monetary Transmission Mechanism in the East African Community," IMF Working Papers 13/39, International Monetary Fund.
    14. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
    15. Roberto Rocha, 2011. "Financial Access and Stability : A Road Map for the Middle East and North Africa," World Bank Other Operational Studies 10868, The World Bank.
    16. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, the monetary transmission mechanism, and monetary policy," Economic Perspectives, Federal Reserve Bank of Chicago, issue Nov, pages 2-14.
    17. Jaromir Benes & Andrew Berg & Rafael Portillo & Mai Dao & Alfredo Baldini, 2012. "Monetary Policy in Low Income Countries in the Face of the Global Crisis," IMF Working Papers 12/94, International Monetary Fund.
    18. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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