Financial sector reforms and monetary policy reforms in Zambia
ABSTRACT The dissertation comprises four chapters focusing on issues concerning policy re-forms and monetary policy in Zambia. Chapter 1 briefly outlines the theoretical foundations for the reforms undertaken in Zambia since the mid 1980s and the process thereof. The main issues addressed were the removal of interest rate and credit controls, exchange rate devaluation and the use of indirect instruments in implementing monetary policy. Monetary policy also began to focus more on stabilisation through bringing the inflation rate down. The review indicates that although the control of inflation is still difficult and figures are still in double digit levels, annual inflation rates have reduced significantly compared to levels achieved in the early 1990s. The nominal exchange rate has been depreciating prompting increased intervention from the central bank. Despite the increase in nominal interest rates, real deposit rates have remained negative. Chapter two analyses the monetary transmission mechanism in Zambia. Vector auto -regressions are estimated for the pre-reform and post-reform periods. Variance decompositions and impulse response functions are examined to see whether there are any changes observed in the monetary transmission mechanism after the reforms. Different systems are estimated in each period using alternate variables as measures of monetary policy shocks. The results show that contractionary monetary policy is followed by a fall in both output and prices. When compared, results from the two estimation periods show that both the responsiveness of prices and output to policy shocks and the magnitude of their forecast error variance decompositions explained by these variables have increased since the reforms. The results also show that the impact lags have reduced. There is evidence of the bank lending channel both before and after the reforms. Of the mechanisms estimated, the exchange rate mechanism seems to be the most important mechanism for transmission of policy shocks to both prices and output during the post-reform period. Chapter three investigates whether monetary aggregates have useful information for predicting inflation other than that provided by inflation itself. Fore-casting experiments are conducted to see whether monetary aggregates and selected financial sector variables are useful in predicting inflation. We perform forecasting experiments and compare the performance of different models. We also estimate an error correction model of inflation. Of the monetary aggregates considered, M2 contains the most information and its growth rate significant in the inflation model. The external sector variables are also important. The results indicate that inflation exhibits a high level of inertia suggesting the presence of implicit indexation and significant inflationary expectations possibly due to past fiscal effects and low policy credibility. Overall, the foreign sector variables seem to be more important for movements in prices than monetary aggregates even in the long run. The importance of the exchange rate to stabilisation policy in Zambia is underscored by the results obtained in chapters 2 and 3. In this paper, we pursue this idea by investigating the effect of central bank intervention on ex-change rates in Zambia. Using a GARCH (1, 1) model of the exchange rate, we simultaneously estimate the effect of cumulative intervention on the mean and variance of the exchange rate. We find that central bank intervention in the foreign exchange market increases the mean but reduces the variance of the exchange rate. The explanation leans towards speculative bandwagons and a 'leaning against the wind' strategy. Although there is no attempt to distinguish through which channel intervention operates, we argue that this is more likely to be a signalling effect rather than a portfolio balance effect. This effect operates mainly through the supply and demand of foreign exchange in the market.
|Date of creation:||Feb 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Alan A. Rabin & Leland B. Yeager, 1997. "The Monetary Transmission Mechanism," Eastern Economic Journal, Eastern Economic Association, vol. 23(3), pages 293-299, Summer.
- Rasmus Fatum & Michael M. Hutchison, 2003.
"Is sterilised foreign exchange intervention effective after all? an event study approach,"
Royal Economic Society, vol. 113(487), pages 390-411, 04.
- Rasmus Fatum & Michael M. Hutchison, . "Is Sterilized Foreign Exchange Intervention Effective After All? An Event Study Approach," EPRU Working Paper Series 99-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Adam, Christopher, 1995. "Fiscal adjustment, financial liberalization, and the dynamics of inflation: Some evidence from Zambia," World Development, Elsevier, vol. 23(5), pages 735-750, May.
- Ellis W. Tallman & Naveen Chandra, 1996.
"The Information Content of Financial Aggregates in Australia,"
RBA Research Discussion Papers
rdp9606, Reserve Bank of Australia.
- Ellis W. Tallman & Naveen Chandra, 1996. "The information content of financial aggregates in Australia," Working Paper 96-14, Federal Reserve Bank of Atlanta.
- Frederic S. Mishkin, 1990.
"Asymmetric Information and Financial Crises: A Historical Perspective,"
NBER Working Papers
3400, National Bureau of Economic Research, Inc.
- Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc.
- Peter J. Montiel, 1991.
"The Transmission Mechanism for Monetary Policy in Developing Countries,"
IMF Staff Papers,
Palgrave Macmillan, vol. 38(1), pages 83-108, March.
- Peter Montiel, 1990. "The Transmission Mechanism for Monetary Policy in Developing Countries," IMF Working Papers 90/47, International Monetary Fund.
- Christopher J. Neely, 2000.
"The practice of central bank intervention: looking under the hood,"
2000-028, Federal Reserve Bank of St. Louis.
- Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
- Owen F. Humpage, 1996.
"U.S. intervention: assessing the probability of success,"
9608, Federal Reserve Bank of Cleveland.
- Humpage, Owen F, 1999. "U.S. Intervention: Assessing the Probability of Success," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(4), pages 731-47, November.
- Engel, Charles & Rodrigues, Anthony P, 1989.
"Tests of International CAPM with Time-Varying Covariances,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 4(2), pages 119-38, April-Jun.
- Charles Engel & Anthony P. Rodrigues, 1987. "Tests of International CAPM with Time-Varying Covariances," NBER Working Papers 2303, National Bureau of Economic Research, Inc.
- Matías Tapia & Andrea Tokman, 2004.
"Effects of Foreign Exchange Intervention under Public Information: The Chilean Case,"
JOURNAL OF LACEA ECONOMIA,
LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
- Matías Tapia & Andrea Tokman, 2004. "Effects of Foreign Exchange Intervention Under Public Information: the Chilean Case," Working Papers Central Bank of Chile 255, Central Bank of Chile.
- Hung, Juann H, 1997. "Intervention strategies and exchange rate volatility: a noise trading perspective," Journal of International Money and Finance, Elsevier, vol. 16(5), pages 779-793, September.
- Ghosh, Atish R., 1992.
"Is it signalling? Exchange intervention and the dollar-Deutschemark rate,"
Journal of International Economics,
Elsevier, vol. 32(3-4), pages 201-220, May.
- Ghosh, A.R., 1990. "Is It Signalling Exchange Intervention And The Dollar- Deutschemark Rate," Papers 48, Princeton, Woodrow Wilson School - Discussion Paper.
- Domac, Ilker & Mendoza, Alfonso, 2004. "Is there room for foreign exchange interventions under an inflation targeting framework ? Evidence from Mexico and Turkey," Policy Research Working Paper Series 3288, The World Bank.
- Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
- Rasmus Fatum & Michael M. Hutchison, .
"ECB Foreign Exchange Intervention and the Euro: Institutional Framework, News and Intervention,"
EPRU Working Paper Series
02-10, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- Rasmus Fatum & Michael Hutchison, 2002. "ECB Foreign Exchange Intervention and the EURO: Institutional Framework, News, and Intervention," Open Economies Review, Springer, vol. 13(4), pages 413-425, October.
- Levent, Korap, 2007. "Information content of exchange rate volatility: Turkish experience," MPRA Paper 19598, University Library of Munich, Germany.
- Simwaka, Kisu, 2006. "The effectiveness of official intervention in foreign exchange market in Malawi," MPRA Paper 1123, University Library of Munich, Germany.
- Engle, Robert F & Lilien, David M & Robins, Russell P, 1987. "Estimating Time Varying Risk Premia in the Term Structure: The Arch-M Model," Econometrica, Econometric Society, vol. 55(2), pages 391-407, March.
- Rogoff, Kenneth, 1984. "On the effects of sterilized intervention : An analysis of weekly data," Journal of Monetary Economics, Elsevier, vol. 14(2), pages 133-150, September.
- Sanjay Ramchander & R. Raymond Sant, 2002. "The impact of federal reserve intervention on exchange rate volatility: evidence from the futures markets," Applied Financial Economics, Taylor & Francis Journals, vol. 12(4), pages 231-240.
- John B. Taylor, 1995.
"The monetary transmission mechanism: an empirical framework,"
Working Papers in Applied Economic Theory
95-07, Federal Reserve Bank of San Francisco.
- John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
- Christopher J. Neely, 2005.
"An analysis of recent studies of the effect of foreign exchange intervention,"
Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
- Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Working Papers 2005-030, Federal Reserve Bank of St. Louis.
- Juselius, Katarina, 1992. "Domestic and foreign effects on prices in an open economy: The case of Denmark," Journal of Policy Modeling, Elsevier, vol. 14(4), pages 401-428, August.
- Hutchison, Michael & Walsh, Carl E., 1992. "Empirical evidence on the insulation properties of fixed and flexible exchange rates : The Japanese experience," Journal of International Economics, Elsevier, vol. 32(3-4), pages 241-263, May.
- Rogers, J. M. & Siklos, P. L., 2003.
"Foreign exchange market intervention in two small open economies: the Canadian and Australian experience,"
Journal of International Money and Finance,
Elsevier, vol. 22(3), pages 393-416, June.
- Jeff M. Rogers & Pierre Siklos, 2001. "Foreign Exchange Market Intervention in Two Small Open Economies: The Canadian and Australian Experience," Research Paper Series 57, Quantitative Finance Research Centre, University of Technology, Sydney.
- Lewis, Karen K., 1988. "Testing the portfolio balance model: A multi-lateral approach," Journal of International Economics, Elsevier, vol. 24(1-2), pages 109-127, February.
- Goodwin, Paul & Lawton, Richard, 1999. "On the asymmetry of the symmetric MAPE," International Journal of Forecasting, Elsevier, vol. 15(4), pages 405-408, October.
- Piti Disyatat & Gabriele Galati, 2005. "The effectiveness of foreign exchange intervention in emerging market countries," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 97-113 Bank for International Settlements.
- Humpage, Owen F., 2000. "The United States as an informed foreign-exchange speculator," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 287-302, December.
- Ellis W. Tallman & Naveen Chandra, 1997.
"Financial Aggregates as Conditioning Information for Australian Output and Inflation,"
RBA Research Discussion Papers
rdp9704, Reserve Bank of Australia.
- Ellis W. Tallman & Naveen Chandra, 1997. "Financial aggregates as conditioning information for Australian output and inflation," Working Paper 97-8, Federal Reserve Bank of Atlanta.
- Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December.
- Michael M. Knetter, 1997. "The Segmentation of International Markets: Evidence from The Economist," NBER Working Papers 5878, National Bureau of Economic Research, Inc.
- Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
- Lewis, Karen K, 1995. "Occasional Interventions to Target Rates," American Economic Review, American Economic Association, vol. 85(4), pages 691-715, September.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:21575. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.