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Monetary transmission in low income countries

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Abstract

This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.

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Bibliographic Info

Paper provided by Department of Economics, Williams College in its series Center for Development Economics with number 2010-06.

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Length: 40 pages
Date of creation: Jul 2010
Date of revision:
Handle: RePEc:wil:wilcde:2010-06

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Keywords: monetary policy; exchange rate; interest rate; banks; credit; institutions;

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  1. Pablo A. Acosta & Nicole Rae Baerg & Federico S. Mandelman, 2009. "Financial development, remittances, and real exchange rate appreciation," Economic Review, Federal Reserve Bank of Atlanta, pages 1-12.
  2. Jimborean, Ramona, 2009. "The role of banks in the monetary policy transmission in the new EU member states," Economic Systems, Elsevier, vol. 33(4), pages 360-375, December.
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Citations

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Cited by:
  1. Jamilov, Rustam, 2012. "Channels of Monetary Transmission in the CIS," MPRA Paper 39568, University Library of Munich, Germany.
  2. Muhammad-Bashir Owolabi Yusuf & Gairuzazmi Mat Ghani & Ahamed Kameel Mydin Meera, 2013. "The Challenges of Implementing Gold Dinar in Kelantan: An Empirical Analysis," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 5(3), pages 97-114, October.
  3. Bhattacharya, Rudrani & Patnaik, Ila & Shah, Ajay, 2011. "Monetary policy transmission in an emerging market setting," Working Papers 11/78, National Institute of Public Finance and Policy.
  4. Nikoloz Gigineishvili, 2011. "Determinants of Interest Rate Pass-Through," IMF Working Papers 11/176, International Monetary Fund.
  5. Mauricio Moura & Caio Piza & Marcos Poplawski-Ribeiro, 2011. "The Distributive Effects of Land Titleon Labor Supply," IMF Working Papers 11/131, International Monetary Fund.
  6. International Monetary Fund, 2011. "Monetary Transmission in Dollarized and Non-Dollarized Economies," IMF Working Papers 11/87, International Monetary Fund.

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