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Monetary Policy Transmission in an Emerging Market Setting

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  • Ila Patnaik
  • Ajay Shah
  • Rudrani Bhattacharya

Abstract

Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchangerate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.

Suggested Citation

  • Ila Patnaik & Ajay Shah & Rudrani Bhattacharya, 2011. "Monetary Policy Transmission in an Emerging Market Setting," IMF Working Papers 2011/005, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2011/005
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    More about this item

    Keywords

    WP; sc; exchange rate; interest rate; Monetary policy transmission; Exchange rate pass-through; interest rate channel; transmission mechanism; interest rate hike; channel of monetary policy; open economy; Exchange rates; Wholesale price indexes; Price indexes; Central bank policy rate; East Asia;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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