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Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia

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  • Mr. Jaromir Benes
  • Mr. Andrew Berg
  • Mr. Rafael A Portillo
  • Mai Dao
  • Mr. 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.

Suggested Citation

  • Mr. Jaromir Benes & Mr. Andrew Berg & Mr. Rafael A Portillo & Mai Dao & Mr. Alfredo Baldini, 2012. "Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia," IMF Working Papers 2012/094, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2012/094
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    Cited by:

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    2. Jane Mpapalika & Christopher Malikane, 2019. "The Determinants of Sovereign Risk Premium in African Countries," JRFM, MDPI, vol. 12(1), pages 1-20, February.
    3. Filiz Unsal & Margarita Rubio, 2016. "Macroprudential Policies in Low-Income Countries," 2016 Meeting Papers 1230, Society for Economic Dynamics.
    4. Mr. Robert Blotevogel, 2013. "Measuring and Mending Monetary Policy Effectiveness Under Capital Account Restrictions: Lessons from Mauritania," IMF Working Papers 2013/077, International Monetary Fund.
    5. Anthony M. Simpasa & Boaz Nandwa & Tiguéné Nabassaga, 2014. "Working Paper - 211 - Bank Lending Channel of Monetary Policy Transmission in Zambia: Evidence from Bank-Level Data," Working Paper Series 2147, African Development Bank.
    6. Michal Andrle & Mr. Andrew Berg & Mr. R. Armando Morales & Mr. Rafael A Portillo & Mr. Jan Vlcek, 2013. "Forecasting and Monetary Policy Analysis in Low-Income Countries: Food and non-Food Inflation in Kenya," IMF Working Papers 2013/061, International Monetary Fund.
    7. Ms. Grace B Li & Mr. Stephen A. O'Connell & Mr. Christopher S Adam & Mr. Andrew Berg & Mr. Peter J Montiel, 2016. "VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries," IMF Working Papers 2016/090, International Monetary Fund.
    8. International Monetary Fund, 2011. "Zambia: Ex Post Assessment of Longer-Term Program Engagement: Update," IMF Staff Country Reports 2011/197, International Monetary Fund.
    9. Tamim Bayoumi & Giovanni Dell'Ariccia & Karl F Habermeier & Tommaso Mancini Griffoli & Fabian Valencia, 2014. "Monetary Policy in the New Normal," IMF Staff Discussion Notes 14/3, International Monetary Fund.
    10. Francis Leni Anguyo & Rangan Gupta & Kevin Kotzé, 2020. "Monetary policy and financial frictions in a small open-economy model for Uganda," Empirical Economics, Springer, vol. 59(3), pages 1213-1241, September.

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