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Is Monetary Policy Effective When Credit is Low?

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  • International Monetary Fund

Abstract

Monetary policy, at least in part, operates through both an interest rate and credit channel. The question arises, therefore, whether monetary policy is a less potent a device in affecting output and inflation in countries that have low levels of credit and where investment and consumption are not financed by borrowing in local currency. This paper employs a Panel Vector Auto Regression approach to examine the empirical evidence in a broad sample of emerging market countries. The data suggests that the effectiveness of changes in policy interest rates in influencing the path of inflation appear to be unrelated to the level of credit and that, instead, the willingness to allow exchange rate flexibility is a far more important determining factor.

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  • International Monetary Fund, 2008. "Is Monetary Policy Effective When Credit is Low?," IMF Working Papers 2008/288, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2008/288
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    Cited by:

    1. Santiago Acosta-O. & David Coble, 2013. "The Interest rate and Exchange Rate Channels in Dollarized and non-dollarized Economies: The Eases of Chile, New Zealand, Peru and Uruguay," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 16(1), pages 04-23, April.
    2. Ghosh, Atish R. & Ostry, Jonathan D. & Qureshi, Mahvash S., 2018. "Taming the Tide of Capital Flows: A Policy Guide," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262037165, April.
    3. Mr. Luis Brandão-Marques & Mr. Gaston Gelos & Mr. Thomas Harjes & Ms. Ratna Sahay & Yi Xue, 2020. "Monetary Policy Transmission in Emerging Markets and Developing Economies," IMF Working Papers 2020/035, International Monetary Fund.
    4. Tas, Bedri Kamil Onur, 2011. "An explanation for the price puzzle: Asymmetric information and expectation dynamics," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 259-275, June.
    5. Mr. Santiago Acosta Ormaechea & Mr. David O Coble Fernandez, 2011. "The Monetary Transmission in Dollarized and Non-Dollarized Economies: The Cases of Chile, New Zealand, Peru and Uruguay," IMF Working Papers 2011/087, International Monetary Fund.
    6. Gelos, Gaston & Ustyugova, Yulia, 2017. "Inflation responses to commodity price shocks – How and why do countries differ?," Journal of International Money and Finance, Elsevier, vol. 72(C), pages 28-47.

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