Is Monetary Policy Effective When Credit is Low?

December 1, 2008

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Format: Chicago

Is Monetary Policy Effective When Credit is Low?, (USA: International Monetary Fund, 2008) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Credit, Exchange rate arrangements, Inflation, Producer prices, Vector autoregression

Keywords: Interest rate, Interest rate channel, Monetary policy effectiveness, Oil producer price inflation, WP

Publication Details

Pages:

17
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/288
Stock No:

WPIEA2008288
ISBN:

9781451871463
ISSN:

1018-5941

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