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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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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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References

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  1. Valerie A. Ramey, 1993. "How Important is the Credit Channel in the Transmission of Monetary Policy?," NBER Working Papers 4285, National Bureau of Economic Research, Inc.
  2. Ewa Wrobel & Tomasz Lyziak & Jan Przystupa, 2008. "Monetary Policy Transmission in Poland: a Study of the Importance of Interest Rate and Credit Channels," SUERF Studies, SUERF - The European Money and Finance Forum, number 2008/1 edited by Morten Balling, 03.
  3. Le Viet, H. & Pfau, W.D., 2009. "VAR Analysis of the Monetary Transmission Mechanism in Vietnam," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 9(1).
  4. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
  5. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings, Federal Reserve Bank of Kansas City, pages 329-368.
  6. Konstantins Benkovskis, 2008. "Is there a Bank Lending Channel of Monetary Policy in Latvia? Evidence from Bank Level Data," Working Papers 2008/01, Latvijas Banka.
  7. Balázs Égert & Ronald MacDonald, 2008. "Monetary Transmission Mechanism in Central and Eastern Europe: Surveying the Surveyable," OECD Economics Department Working Papers 654, OECD Publishing.
  8. 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.
  9. Jean-François Segalotto & Marco Arnone & Bernard Laurens, 2006. "Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies," IMF Working Papers 06/228, International Monetary Fund.
  10. Thorsten Beck & Asli Demirgüç-Kunt & Ross Levine, 2010. "Financial Institutions and Markets across Countries and over Time: The Updated Financial Development and Structure Database," World Bank Economic Review, World Bank Group, vol. 24(1), pages 77-92, January.
  11. Fiorella De Fiore, 1998. "The Transmission of Monetary Policy in Israel," IMF Working Papers 98/114, International Monetary Fund.
  12. Georgy Ganev & Krisztina Molnar & Krzysztof Rybinski & Przemyslaw Wozniak, 2002. "Transmission Mechanism of Monetary Policy in Centraland Eastern Europe," CASE Network Reports 0052, CASE-Center for Social and Economic Research.
  13. Claudia Kwapil & Johann Scharler, 2006. "Limited Pass-Through from Policy to Retail Interest Rates: Empirical Evidence and Macroeconomic Implications," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 4, pages 26-36, January 2.
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Cited by:
  1. Nikoloz Gigineishvili, 2011. "Determinants of Interest Rate Pass-Through: Do Macroeconomic Conditions and Financial Market Structure Matter?," IMF Working Papers 11/176, International Monetary Fund.
  2. Ila Patnaik & Ajay Shah & Rudrani Bhattacharya, 2011. "Monetary policy transmission in an emerging market setting," IMF Working Papers 11/5, International Monetary Fund.
  3. Jamilov, Rustam, 2012. "Channels of Monetary Transmission in the CIS," MPRA Paper 39568, University Library of Munich, Germany.
  4. Mauricio Moura & Caio Piza & Marcos Poplawski-Ribeiro, 2011. "The Distributive Effects of Land Title on Labor Supply: Evidence from Brazil," IMF Working Papers 11/131, International Monetary Fund.
  5. International Monetary Fund, 2011. "Monetary Transmission in Dollarized and Non-Dollarized Economies: The Cases of Chile, New Zealand, Peru and Uruguay," IMF Working Papers 11/87, International Monetary Fund.

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