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Is Monetary Policy Effective When Credit is Low?

  • International Monetary Fund
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    Monetary policy, at least in part, operates through both an interest rate and credit channel. The question arises, therefore, whether monetary policy is a less potent a device in affecting output and inflation in countries that have low levels of credit and where investment and consumption are not financed by borrowing in local currency. This paper employs a Panel Vector Auto Regression approach to examine the empirical evidence in a broad sample of emerging market countries. The data suggests that the effectiveness of changes in policy interest rates in influencing the path of inflation appear to be unrelated to the level of credit and that, instead, the willingness to allow exchange rate flexibility is a far more important determining factor.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/288.

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    Length: 17
    Date of creation: 01 Dec 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/288
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    19. Zenon Quispe Misaico, 2001. "Transmission mechanisms of monetary policy in an economy with partial dollarisation: the case of Peru," BIS Papers chapters, in: Bank for International Settlements (ed.), Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries, volume 8, pages 210-231 Bank for International Settlements.
    20. Liliana Rojas-Suarez, 2007. "The Provision of Banking Services in Latin America: Obstacles and Recommendations," Working Papers 124, Center for Global Development.
    21. André Minella, 2001. "Monetary Policy and Inflation in Brazil (1975-2000): a VAR Estimation," Working Papers Series 33, Central Bank of Brazil, Research Department.
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    23. Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta).
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    25. Ben S.C. Fung, 2002. "A VAR analysis of the effects of monetary policy in East Asia," BIS Working Papers 119, Bank for International Settlements.
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