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Financial Development and Monetary Policy Efficiency: Unraveling the Empirical Contradiction and Discovering the True Relation

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  • Mahmood -ur- Rahman

    (GSICS, Kobe University, Japan)

Abstract

Considering the contradicting findings and inadequate theoretical framework, this paper re-investigates the relationship between financial development and monetary policy effectiveness utilizing panel data from 40 economies, covering the time-span 1992-2014.This research shows that the influence of monetary policy in conjunction with financial development on output growth and inflation tends to be positive and negative, respectively, although quite meager in magnitude, where the System GMM for the combined data set is thought to be the more appropriate estimation technique as it addresses the endogeneity problem. It implies that financial development enhances monetary policy effectiveness. As monetary expansion, combined with financial development can cause sustainable growth, so, financial development is instrumental in policy effectiveness and consequently, must be considered meticulously for appropriate monetary policy formulation. Expansionary monetary policy could be more effective in the developed economies for output expansion and influence inflation more in the developing world.

Suggested Citation

  • Mahmood -ur- Rahman, 2018. "Financial Development and Monetary Policy Efficiency: Unraveling the Empirical Contradiction and Discovering the True Relation," Economics Bulletin, AccessEcon, vol. 38(1), pages 281-296.
    • Handle: RePEc:ebl:ecbull:eb-17-00479
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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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