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Monetary Transmission: Are Emerging Market and Low Income Countries Different?

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  • Mr. Ales Bulir
  • Mr. Jan Vlcek

Abstract

We use two alternative representations of the yield curve to test the functioning of the interest rate transmission mechanism along the yield curve based on government paper in a sample of emerging market and low-income countries. We find a robust link from shortterm policy and interbank rates to longer-term bond yields. Two policy implications emerge. First, the presence of well-developed secondary financial markets does not seem to affect transmission of short term rates along the yield curve. Second, the strength of the transmission mechanism seems to be affected by the choice of the monetary regime: countries with a credible inflation targeting regime seem to have “better behaved” yield curves than those with other monetary regimes.

Suggested Citation

  • Mr. Ales Bulir & Mr. Jan Vlcek, 2015. "Monetary Transmission: Are Emerging Market and Low Income Countries Different?," IMF Working Papers 2015/239, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2015/239
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    More about this item

    Keywords

    WP; rate; central bank; Monetary transmission; yield curve; monetary policy rate; yield curve variability; bond rate movement; monetary policy regime; central bank action; central bank interest rate; well-behaved yield curve; yield-curve calculation; monetary policy action; monetary policy stance; interest rate move; yield curve pivot; Central bank rates; Interbank rates; Central bank policy rate; Inflation targeting; Africa;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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