IDEAS home Printed from
   My bibliography  Save this article

On the Transmission Mechanism of Policy Shocks in Developing Countries


  • Magda Kandil


The debate over the effectiveness of demand-side stabilizing policies has often centred over the relative effectiveness of monetary and fiscal policies. Demand- and supply-side constraints are both relevant. On the supply side, price flexibility may be the result of structural and/or institutional constraints that warrant a larger degree of price adjustment in the face of demand fluctuations. On the demand side, structural constraints may hinder the transmission mechanism of demand fluctuations, resulting in an inelastic aggregate demand in the face of policy adjustments. Using data for 50 developing countries, supply-side constraints do not differentiate the transmission mechanism of policy shocks to price inflation and output growth. In contrast, a larger demand shift in the face of monetary and government spending shocks increases the real and inflationary effects of policy shocks. The pronounced evidence of upward price flexibility points to the importance of addressing supply-side capacity constraints to counter inflationary pressures in developing countries. Equally important is to analyse determinants of private spending to identify channels for influencing aggregate spending and maximizing the effectiveness of stabilization policies.

Suggested Citation

  • Magda Kandil, 2006. "On the Transmission Mechanism of Policy Shocks in Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 34(2), pages 117-149.
  • Handle: RePEc:taf:oxdevs:v:34:y:2006:i:2:p:117-149
    DOI: 10.1080/13600810600704984

    Download full text from publisher

    File URL:
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to search for a different version of it.


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Alain Durré & Bernard J Laurens & Alexandre Chailloux, 2009. "Requirements for Using Interest Rates As An Operating Target for Monetary Policy; The Case of Tunisia," IMF Working Papers 09/149, International Monetary Fund.

    More about this item


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:oxdevs:v:34:y:2006:i:2:p:117-149. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Chris Longhurst). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.