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Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

  • Sanchita Mukherjee
  • Rina Bhattacharya

In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/229.

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Length: 27
Date of creation: 01 Oct 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/229
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  1. Maurice Obstfeld, 1998. "The Global Capital Market: Benefactor or Menace?," NBER Working Papers 6559, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Tokatlidis, Ioannis, 2000. "Financial Liberalization: The African Experience," MPRA Paper 13423, University Library of Munich, Germany.
  3. Lahcen ACHY, 2004. "Financial liberalization, saving, investment and growth in MENA countries," Finance 0411004, EconWPA.
  4. Reinhart, Carmen & Ostry, Jonathan, 1995. "Saving and real interest rates in developing countries," MPRA Paper 13352, University Library of Munich, Germany.
  5. Kenichi Ueda & Robert M. Townsend, 2007. "Welfare Gains from Financial Liberalization," IMF Working Papers 07/154, International Monetary Fund.
  6. Joshua Greene & Delano Villanueva, 1991. "Private Investment in Developing Countries: An Empirical Analysis," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 33-58, March.
  7. Mustapha Kamel Nabli, 2007. "Breaking the Barriers to Higher Economic Growth : Better Governance and Deeper Reforms in the Middle East and North Africa," World Bank Publications, The World Bank, number 6914.
  8. Ben Naceur, Samy & Ghazouani, Samir & Omran, Mohammed, 2008. "Does stock market liberalization spur financial and economic development in the MENA region?," Journal of Comparative Economics, Elsevier, vol. 36(4), pages 673-693, December.
  9. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
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