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Monetary Policy Transmission Mechanisms in Pacific Island Countries

  • Jonathan C. Dunn
  • Matt Davies
  • Yongzheng Yang
  • Yiqun Wu
  • Shengzu Wang

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/96.

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Length: 24
Date of creation: 01 Apr 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/96
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  1. Rup Singh & Saten Kumar, 2010. "Some empirical evidence on the demand for money in the Pacific Island countries," Studies in Economics and Finance, Emerald Group Publishing, vol. 27(3), pages 211-222, August.
  2. Alessandro Rebucci & Marco A Espinosa-Vega, 2003. "Retail Bank Interest Rate Pass-Through; Is Chile Atypical?," IMF Working Papers 03/112, International Monetary Fund.
  3. Norman Loayza & Klaus Schmidt-Hebbel, 2002. "Monetary Policy Functions and Transmission Mechanisms: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 1, pages 001-020 Central Bank of Chile.
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