IDEAS home Printed from https://ideas.repec.org/a/taf/oxdevs/v34y2006i2p117-149.html
   My bibliography  Save this article

On the Transmission Mechanism of Policy Shocks in Developing Countries

Author

Listed:
  • Magda Kandil

Abstract

The debate over the effectiveness of demand-side stabilizing policies has often centred over the relative effectiveness of monetary and fiscal policies. Demand- and supply-side constraints are both relevant. On the supply side, price flexibility may be the result of structural and/or institutional constraints that warrant a larger degree of price adjustment in the face of demand fluctuations. On the demand side, structural constraints may hinder the transmission mechanism of demand fluctuations, resulting in an inelastic aggregate demand in the face of policy adjustments. Using data for 50 developing countries, supply-side constraints do not differentiate the transmission mechanism of policy shocks to price inflation and output growth. In contrast, a larger demand shift in the face of monetary and government spending shocks increases the real and inflationary effects of policy shocks. The pronounced evidence of upward price flexibility points to the importance of addressing supply-side capacity constraints to counter inflationary pressures in developing countries. Equally important is to analyse determinants of private spending to identify channels for influencing aggregate spending and maximizing the effectiveness of stabilization policies.

Suggested Citation

  • Magda Kandil, 2006. "On the Transmission Mechanism of Policy Shocks in Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 34(2), pages 117-149.
    • Handle: RePEc:taf:oxdevs:v:34:y:2006:i:2:p:117-149
    DOI: 10.1080/13600810600704984
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/13600810600704984
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/13600810600704984?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. D. Sapsford & P. Sarkar & H. W. Singer, 1992. "The prebisch‐singer terms of trade controversy revisited," Journal of International Development, John Wiley & Sons, Ltd., vol. 4(3), pages 315-332, May.
    2. Engle, Robert F., 1982. "A general approach to lagrange multiplier model diagnostics," Journal of Econometrics, Elsevier, vol. 20(1), pages 83-104, October.
    3. Solimano, Andres, 1986. "Contractionary devaluation in the southern cone : The case of Chile," Journal of Development Economics, Elsevier, vol. 23(1), pages 135-151, September.
    4. Edward, Sebastian, 1986. "Are Devaluations Contractionary?," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 501-508, August.
    5. Mishkin, Frederie S., 1981. "Monetary policy and long-term interest rates : An efficient markets approach," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 29-55.
    6. Gray, Jo Anna, 1978. "On Indexation and Contract Length," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 1-18, February.
    7. Adrian Pagan, 1986. "Two Stage and Related Estimators and Their Applications," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 53(4), pages 517-538.
    8. Wallace, Myles S & Warner, John T, 1993. "The Fisher Effect and the Term Structure of Interest Rates: Tests of Cointegration," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 320-324, May.
    9. Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 59-76, January.
    10. Kandil, Magda, 1993. "Economic stabilization in developed and developing countries: An empirical investigation," Journal of Macroeconomics, Elsevier, vol. 15(2), pages 365-380.
    11. Evans, Paul, 1987. "Do budget deficits raise nominal interest rates? : Evidence from six countries," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 281-300, September.
    12. Leeper, Eric M. & Gordon, David B., 1992. "In search of the liquidity effect," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 341-369, June.
    13. James Cover & David Hoose, 2002. "Asymmetric wage indexation," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 30(1), pages 34-47, March.
    14. Beck, Stacie E., 1993. "The Ricardian equivalence proposition: evidence from foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 12(2), pages 154-169, April.
    15. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February.
    16. repec:bla:econom:v:58:y:1991:i:232:p:441-59 is not listed on IDEAS
    17. J. Saul Lizondo & Peter J. Montiel, 1989. "Contractionary Devaluation in Developing Countries: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 36(1), pages 182-227, March.
    18. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
    19. Fry, Maxwell J., 1982. "Models of financially repressed developing economies," World Development, Elsevier, vol. 10(9), pages 731-750, September.
    20. Porter, Richard C. & Ranney, Susan I., 1982. "An eclectic model of recent LDC macroeconomic policy analyses," World Development, Elsevier, vol. 10(9), pages 751-765, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alain Durré & Mr. Bernard J Laurens & Alexandre Chailloux, 2009. "Requirements for Using Interest Rates As An Operating Target for Monetary Policy: The Case of Tunisia," IMF Working Papers 2009/149, International Monetary Fund.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Magda Kandil, 2005. "On the Effects of Government Spending Shocks in Developing Countries," Oxford Development Studies, Taylor & Francis Journals, vol. 33(2), pages 269-304.
    2. Magda Kandil & Ida Aghdas Mirzaie, 2008. "Comparative Analysis Of Exchange Rate Appreciation And Aggregate Economic Activity: Theory And Evidence From Middle Eastern Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 60(1), pages 45-96, January.
    3. Magda Kandil, 2019. "External Cyclicality in the Face of Aggregate Demand Shocks: Pros and Cons Across Developed and Developing Countries," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 48(1), February.
    4. Kandil, Magda, 2007. "The wage-price spiral: International evidence and implications," Journal of Economics and Business, Elsevier, vol. 59(3), pages 212-240.
    5. Magda Kandil, 2006. "On the transmission of exchange rate fluctuations to the macroeconomy: Contrasting evidence for developing and developed countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(1), pages 101-127.
    6. Kandil, Magda, 2006. "Variation in the effects of government spending shocks with methods of financing: Evidence from the U.S," International Review of Economics & Finance, Elsevier, vol. 15(4), pages 463-486.
    7. Magda Kandil, 2009. "Public Spending and the Macroeconomy: Evidence from Developing and Developed Countries," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 8(2), pages 133-158, August.
    8. Fahmy, Yasser A. F. & Kandil, Magda, 2003. "The Fisher effect: new evidence and implications," International Review of Economics & Finance, Elsevier, vol. 12(4), pages 451-465.
    9. Kandil, Magda, 2017. "Crowding out or crowding in? Correlations of spending components within and across countries," Research in International Business and Finance, Elsevier, vol. 42(C), pages 1254-1273.
    10. Magda Kandil, 2016. "On the relationship between public and private spending in developing and developed countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 25(2), pages 165-191, March.
    11. Kandil, Magda & Berument, Hakan & Dincer, N. Nergiz, 2007. "The effects of exchange rate fluctuations on economic activity in Turkey," Journal of Asian Economics, Elsevier, vol. 18(3), pages 466-489, June.
    12. Kandil, Magda & Mirzaie, Ida Aghdas, 2003. "The effects of dollar appreciation on sectoral labor market adjustments: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 89-117.
    13. Magda Kandil, 2004. "Exchange Rate Fluctuations And Economic Activity In Developing Countries: Theory And Evidence," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 29(1), pages 85-108, June.
    14. Kandil, Magda, 1998. "Supply-Side Asymmetry and the Non-Neutrality of Demand Fluctuations," Journal of Macroeconomics, Elsevier, vol. 20(4), pages 785-809, October.
    15. Magda Kandil & Ida Mirzaie, 2006. "Consumption and macroeconomic policies: Theory and evidence from developing countries," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(4), pages 469-491.
    16. Nergiz Dincer & Magda Kandil, 2011. "The effects of exchange rate fluctuations on exports: A sectoral analysis for Turkey," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 20(6), pages 809-837, June.
    17. Magda Kandil, 2010. "The asymmetric effects of demand shocks: international evidence on determinants and implications," Applied Economics, Taylor & Francis Journals, vol. 42(17), pages 2127-2145.
    18. Magda Kandil, 2001. "Variation in the Effects of Aggregate Demand Shocks: Evidence and Implications across Industrial Countries," Southern Economic Journal, John Wiley & Sons, vol. 67(3), pages 552-577, January.
    19. Magda Kandil, 2006. "Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries," Bulletin of Economic Research, Wiley Blackwell, vol. 58(1), pages 25-49, January.
    20. Pierre-Richard Agénor, 1991. "Output, devaluation and the real exchange rate in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 127(1), pages 18-41, March.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:oxdevs:v:34:y:2006:i:2:p:117-149. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/CODS20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.