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Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

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  • Sanchita Mukherjee
  • Rina Bhattacharya

Abstract

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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Keywords: Inflation targeting; Monetary policy; Private investment; Private consumption; interest rate elasticity; financial market development; capital account; deposit rate; financial sector; stock market; Financial Markets and the Macroeconomy; Open Economy Macroeconomics; International Policy Coordination and Transmission;

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  1. Maurice Obstfeld., 1998. "The Global Capital Market: Benefactor or Menace?," Center for International and Development Economics Research (CIDER) Working Papers C98-098, University of California at Berkeley.
  2. Reinhart, Carmen & Ostry, Jonathan, 1995. "Saving and real interest rates in developing countries," MPRA Paper 13352, University Library of Munich, Germany.
  3. 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.
  4. Robert M. Townsend & Kenichi Ueda, 2010. "Welfare Gains From Financial Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 553-597, 08.
  5. Carmen M. Reinhart & Ioannis Tokatlidis, 2003. "Financial Liberalisation: The African Experience," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 12(Supplemen), pages 53-88, September.
  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, April.
  8. Jonathan Gruber, 2006. "A Tax-Based Estimate of the Elasticity of Intertemporal Substitution," NBER Working Papers 11945, National Bureau of Economic Research, Inc.
  9. Simon Neaime, 2008. "Monetary Policy Transmission and Targeting Mechanisms in the MENA Region," Working Papers 395, Economic Research Forum, revised Apr 2008.
  10. Lahcen ACHY, 2004. "Financial liberalization, saving, investment and growth in MENA countries," Finance 0411004, EconWPA.
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Cited by:

  1. Montes, Gabriel Caldas, 2013. "Credibility and monetary transmission channels under inflation targeting: An econometric analysis from a developing country," Economic Modelling, Elsevier, vol. 30(C), pages 670-684.
  2. Turhan, Ibrahim M. & Gumus, Nihat, 2014. "On the relative importance of monetary transmission channels in Turkey," MPRA Paper 69827, University Library of Munich, Germany, revised 12 May 2014.
  3. Benson Ogbonna & Kalu Uma, 2014. "Monetary Policy Transmission Mechanism In Nigeria: An Overview," Proceedings of International Academic Conferences 0702101, International Institute of Social and Economic Sciences.
  4. Kapur, Muneesh & Behera, Harendra, 2012. "Monetary Transmission Mechanism in India: A Quarterly Model," MPRA Paper 70631, University Library of Munich, Germany.
  5. Taha Bahadir Sarac & OkYAY Ucan, 2013. "The Interest Rate Channel in Turkey: An Investigation with Kalman Filter Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 3(4), pages 874 - 884.
  6. Kalu E. Uma & Benson M. Ogbonna & Paul Obidike, 2014. "Monetary Policy Transmission Mechanism In Nigeria: An Overview," Proceedings of International Academic Conferences 0702180, International Institute of Social and Economic Sciences.
  7. Dumitriu, Ramona & Stefanescu, Razvan, 2014. "Perspective ale Ċ£intirii inflaĊ£iei
    [Perspectives of the Inflation Targeting]    ," MPRA Paper 52943, University Library of Munich, Germany, revised 14 Jan 2014.
  8. Jamilov, Rustam, 2012. "Channels of Monetary Transmission in the CIS," MPRA Paper 39568, University Library of Munich, Germany.

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