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The Transmission Mechanism in Armenia; New Evidence from a Regime Switching VAR Analysis

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  • International Monetary Fund

Abstract

The introduction of inflation targeting in 2006, together with important economic developments such as dedollarization, marked the beginning of a new macroeconomic framework in Armenia, which is likely to have changed the effectiveness of monetary policy. This paper is the first attempt to analyze whether the transmission mechanism in Armenia has been subject to a structural break by employing a Markov-Switching VAR framework. Results support the existence of such a structural break around the time inflation targeting was introduced and reduced levels of dollarization were observed. Results from introducing a threshold variable into this framework furthermore show that reduced levels of dollarization are an important determinant of the effectiveness of monetary policy.

Suggested Citation

  • International Monetary Fund, 2010. "The Transmission Mechanism in Armenia; New Evidence from a Regime Switching VAR Analysis," IMF Working Papers 10/270, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:10/270
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    1. Al-Mashat Rania & Billmeier Andreas, 2008. "The Monetary Transmission Mechanism in Egypt," Review of Middle East Economics and Finance, De Gruyter, pages 32-82.
    2. Fujiwara, Ippei, 2006. "Evaluating monetary policy when nominal interest rates are almost zero," Journal of the Japanese and International Economies, Elsevier, vol. 20(3), pages 434-453, September.
    3. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2009. "Exchange rate and inflation dynamics in dollarized economies," Journal of Development Economics, Elsevier, vol. 89(1), pages 98-108, May.
    4. Ehrmann, Michael & Ellison, Martin & Valla, Natacha, 2003. "Regime-dependent impulse response functions in a Markov-switching vector autoregression model," Economics Letters, Elsevier, vol. 78(3), pages 295-299, March.
    5. International Monetary Fund, 2007. "Modalities of Moving to Inflation Targeting in Armenia and Georgia," IMF Working Papers 07/133, International Monetary Fund.
    6. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    7. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2014. "Addicted to Dollars," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 1-50, May.
    8. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," Research Department Publications 4423, Inter-American Development Bank, Research Department.
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    Citations

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    Cited by:

    1. Sargsyan Hayk, 2016. "Determinants of Monetary Transmission in Armenia," EERC Working Paper Series 16/02e, EERC Research Network, Russia and CIS.
    2. Poghosyan, Karen & Boldea, Otilia, 2013. "Structural versus matching estimation: Transmission mechanisms in Armenia," Economic Modelling, Elsevier, vol. 30(C), pages 136-148.
    3. Mishra, Prachi & Montiel, Peter, 2013. "How effective is monetary transmission in low-income countries? A survey of the empirical evidence," Economic Systems, Elsevier, vol. 37(2), pages 187-216.
    4. Mishra, Prachi & Montiel, Peter J & Spilimbergo, Antonio, 2011. "How Effective Is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence," CEPR Discussion Papers 8577, C.E.P.R. Discussion Papers.
    5. Poghosyan, K., 2012. "Structural and reduced-form modeling and forecasting with application to Armenia," Other publications TiSEM ad1a24c3-15e6-4f04-b338-3, Tilburg University, School of Economics and Management.
    6. Jamilov, Rustam, 2012. "Channels of Monetary Transmission in the CIS," MPRA Paper 39568, University Library of Munich, Germany.

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