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Evidence on the sectoral monetary transmission process under a fixed exchange rate regime

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  • Winston Moore
  • Marlon Williams

Abstract

Traditional macroeconomic models suggest that monetary policy changes are largely ineffective in fixed exchange rate economies. However, Edwards and Vegh (1997) present a model that shows this might not be the case, as a tightening in monetary policy raises financial costs faced by firms and therefore lowers real wages and, by extension, consumption. This paper empirically tests this hypothesis using data on a country with one of the longest running fixed exchange rate regimes (1975-present). The results of the study confirm the theoretical predictions of Edwards and Vegh, but they also show that the propagation of nominal shocks in fixed exchange rate systems is comparatively slower than in countries with a more flexible exchange rate regime.

Suggested Citation

  • Winston Moore & Marlon Williams, 2008. "Evidence on the sectoral monetary transmission process under a fixed exchange rate regime," International Economic Journal, Taylor & Francis Journals, vol. 22(3), pages 387-398.
    • Handle: RePEc:taf:intecj:v:22:y:2008:i:3:p:387-398
    DOI: 10.1080/10168730802288067
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    References listed on IDEAS

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    1. Roland Craigwell & Kevin Greenidge & Harold Codrington & Mr. Rupert D Worrell, 2003. "Economic Resilience with An Exchange Rate Peg: The Barbados Experience, 1985-2000," IMF Working Papers 2003/168, International Monetary Fund.
    2. Norbert Janssen, 1998. "The demand for M0 in the United Kingdom reconsidered: some specification issues," Bank of England working papers 83, Bank of England.
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    Cited by:

    1. Keyra Primus, 2016. "The Effectiveness of Monetary Policy in Small Open Economies: An Empirical Investigation," IMF Working Papers 2016/189, International Monetary Fund.
    2. Carter, Justin & Moore, Winston & Jackman, Mahalia, 2012. "Is the Magnitude of Household Debt in Barbados a Concern?," MPRA Paper 47791, University Library of Munich, Germany.
    3. Primus, Keyra, 2018. "The effectiveness of monetary policy in small open economies," Journal of Policy Modeling, Elsevier, vol. 40(5), pages 903-933.
    4. Simon, Carl Nally Regi, 2017. "Les canaux de transmission de la politique monetaire en Haiti: une approche narrative (1996-2016) [Monetary transmission channels in Haiti: a narrative approach (1996-2016)]," MPRA Paper 78294, University Library of Munich, Germany.

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