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The Transmission Mechanism of Monetary Policy: Evidence from the Caribbean

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Abstract

This paper presents an empirical analysis of the monetary transmission mechanism in four Caribbean countries: Jamaica, Trinidad and Tobago, Barbados and Guyana. This research is timely since little is known about the transmission mechanism of monetary policy in developing countries in general and in the Caribbean in particular. In developing countries financial markets tend to be relatively unsophisticated hence monetary policy is likely to affect the real sector by altering the quantity and availability of credit rather than the price of credit. The results show that the credit and exchange rate channels are more important than the money channel in transmitting impulses from the financial sector to the real sector. The findings can assist policy makers in other developing countries in the design and implementation of monetary policy.

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... As a result, lenders will be less willing to offer loans (either by demanding greater risk premia or limiting the amount loaned), causing spending and aggregate demand to fall. (Mishkin, 1995;Ramlogan, 2004). Moreover, due to the fact that the countries under investigation are economically integrated, making them vulnerable to external shocks through import prices, we believe it is necessary to examine the explanatory power of the main external variables in addition to the exchange rate and other monetary policy instruments. ...
... Alavi et al. (2016) demonstrated that macroeconomic responses to commodity price shocks in Africa are heterogeneous in terms of magnitude and direction. (Ramlogan, 2004) investigates the transmission mechanism of monetary policy in developing countries in general and the Caribbean in particular. He argues that because developing country financial markets are relatively unsophisticated, monetary policy is more likely to affect the real sector by changing the quantity and availability of credit rather than the price of credit. ...
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As a result of the West African region's continuous political and economic instability, various economies have used monetary policy changes to respond to shocks from macroeconomic causes. Scholars disagree on the mechanisms of monetary policy, external shocks, and macroeconomic activity links in an economy, according to the available literature in both inter-regional and intra-regional evaluations. This article promotes understanding and management of external shocks in monetary policy by focusing on two key goals. (1) To investigate external shocks, macroeconomic performance, and the dynamics of monetary policy in Western African countries. (2) Use the S-VAR method of estimate to investigate the impact of these economic indices on monetary policy dynamics in Nigeria, Ghana, Cameroon, and Niger. The S-VAR method was chosen because it is useful for analysing macroeconomic shocks and monetary policy transmission. The findings reveal that the West African countries are so interconnected, any change in the price of non-oil commodities would have a significant impact on the exchange rate, which will be channelled through policy rates to GDP. We recommend and emphasise the need of diversifying member countries' productive and export bases rather than continuing to rely on one or a few items as the primary source of income.
... Furthermore, many studies on monetary transmission for developing countries were also conducted by those such as Arena et al. (2006), Agung (1998) and Ramlogan (2004). Various channels of monetary transmission are investigated in those countries. ...
... Various channels of monetary transmission are investigated in those countries. The results vary from one country to another, yet all of these studies seem to suggest the existence of credit channel (Ramlogan, 2004;Huang and Pfau, 2008;Ahmad, 2008). Some studies also document on the factors affecting the activeness of the bank lending channel, i.e. size, liquidity and origin of banks (Arena et al., 2006;Agung, 1998). ...
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Monetary policy influences the real economy through various channels including the bank lending. Currently, Malaysia is operating under dual banking systems; conventional and Islamic banking. The latter has distinctive feature of interest-free. Hence, this study aims to empirically explore the relevance of Islamic banks' financing in channeling the monetary policy effects to the real economy. To achieve this objective, the study relies on an autoregressive distributed lag (ARDL) bound testing approach and innovation accounting approach, and uses quarterly data spanning from 1991:Q1 to 2010:Q4. The study documents that Islamic financing channel for monetary transmission exists in Malaysia. Islamic financing is unequally distributed to economic sectors in response to monetary policy shock. Furthermore, the findings also reflect that Islamic banking as operating in dual banking system is not spared from the interest rate and monetary conditions of the country. This clearly shows the behavior of Islamic banking which cannot shun away from the interest rate while its operation delinks from the interest rates. In designing monetary policy, the central bank should consider Islamic financing as an alternative or complement channel for monetary transmission since this channel is just as active as conventional lending channel.
... An influential work by Bernanke and Blinder (1992) uses a vector auto regression (VAR) model to show that a contractionary monetary policy induces a decline in bank loans and economic activities. Many researchers have applied this methodology to different countries (Ashcraft 2006;Kakes & Sturm 2002;Ramlogan 2004;Suzuki, 2004). However, their findings are inconsistent in terms of the role of the bank lending channel. ...
... Overall, their results provide support for the existence of a bank lending channel. Ramlogan (2004) shows that the credit and exchange rate channels are more important than the interest rate channel in Caribbean countries. Buigut (2010) tests the lending channel using a vector error correction model in a framework that allows the identification of the shifts of demand and supply schedules in the bank loan market. ...
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This study explores how monetary policy changes flow through the banking sector in Australia. Drawing on data between 2004 and 2010, we divide banks into three groups according to their size, and examine the impact of that cash rate change on lending of different types of loans. We find the response of bank lending after a monetary policy change varies with the size of the bank as well as the types of loan. Smaller banks are more sensitive to policy rate changes, and household loans, government loans and intra-group loans are less responsive to monetary policy compared with financial and non-financial loans. © 2014 Australasian Accounting Business and Finance Journal and Authors.
... Many researchers have applied this methodology on different countries (e.g. Suzuki, 2001;Ramlogan, 2004;Ashcraft, 2006;Dungey and Fry, 2010). The findings using this approach are inconsistent in terms of the role of the bank lending channel. ...
... Overall, their results provide support for the existence of a bank lending channel. Ramlogan (2004) shows that the credit and exchange rate channels are more important than the interest rate channel in the Caribbean countries. Buigut (2010) tests the lending channel using a vector error correction model in a frame work that allows the identification of the shifts of demand and supply schedules in the bank loan market. ...
Article
The transmission of monetary policy may hold the key to explaining the effects of policy on the economy. The objective of the study is to assess the importance of the bank lending channel in the transmission of monetary policy in Australia. In this paper, we found that the effectiveness of monetary policy varies with the size of the bank as well as the type of the loan. For different asset size and different kinds of loans, the effect of monetary policy is different. Thus, policy has distributional effects on bank loans that depend on asset size and industry in the economy.
... For example, although Robinson and Robinson (1997) do not specifically trace transmission from monetary policy through bank lending rates to aggregate demand, they found that changes in the repo rate had important short-run effects on both prices and economic activity in Jamaica. More convincingly, Ramlogan (2004), using a structural VAR to examine monetary transmission in three Caribbean countries, found that monetary tightening resulted in a contraction in bank credit that was accompanied by slower growth and lower inflation, consistent with an effective bank lending channel operating in those countries. ...
... The differences in response relate not only to the magnitude but also to the duration of the response. (ii) There can also be differences in the direction of changes in lending ratesRamlogan (2004) Structural VAR (i) In each country except Barbados a shock to loans accounts for over 28 per cent of the variance in output over the long run. (ii) In Barbados although credit shocks are not as important as exchange rate shocks at any time horizon, a shock to loans retains a large role in explaining output variability compared to the role of money shocks. ...
Article
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This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.
... For exploring how monetary shocks affect the economy, we employ the VAR methodology, which has been increasingly adopted in recent years (Dabla-Norris and Floerkemeir, 2006;Ramlogan, 2004;Morsink and Bayoumi, 2001). The chief advantage of using standard VAR is that only minimal restrictions need to be imposed. ...
... If there is no contemporaneous feedback from the non-policy variable to policy variable, it is theoretically sound to place the policy variable first in the recursively ordered system. If the contemporaneous correlation among the shocks in the reduced-form VAR is high (Ahmed, 2003;Ramlogan, 2004), ordering becomes a matter of concern. ...
Article
Amongst the South Pacific's least developed small island countries, Samoa has emerged as a successful economy. Its achievements of low inflation and high growth rates have been due to sustained fiscal adjustment programmes and appropriate monetary policy measures. This paper undertakes an empirical study of transmission mechanism of monetary policy by adopting a VAR approach and using quarterly data over a 17-year period (1990-2006). The study findings are that money and exchange rate channels are important channels in transmitting monetary impulses to Samoa's output.
... Numerous of economist and researchers has been devoted on finding evidence for monetary policy effectiveness and its impact on macroeconomic by employing data from difference countries (Mengesha andHolmes, 2013, 2013;Partachi and Mija, 2015). The most frequency mentioned of monetary transmission channels in the previous literature including interest rate channel, credit channel, exchange rate channel, asset price channel and expectation channel (Afandi, 2005;Bhuiyan, 2012;Boivin et al., 2010;Bredin and O'Reilly, 2004;Carlyn, 2004;Loayza and Schmidt-Hebbel, 2002;Maliszewski, 2005;Suzuki, 2004). ...
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The empirical analysis of this study examines the effect of monetary policy on economic growth in Lao PDR. This study uses Vector Autoregressive Model (VAR) and quarterly data from the first quarter of 1995 to the last quarter of 2018. The results found that GDP was negatively responding to price level indicates that a shock in monetary policy or when the central bank adopts an expansionary monetary policy will result in consumer price level, and therefore leads to decline on the real output in the Lao economy. Moreover, this study also found negative effect of the real interest on GDP in Lao PDRD.
... Considering Ramlogan (2004), there are two unlike assets present in the money channel, one is money and all other assets. A reduction in the level of reserves prompts a fall in the level of deposits. ...
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This study aims to explore the association between managerial disclosure beliefs and companies’ nature in disclosing information to the market. It conveys a cognitional aspect that holds beliefs underlying the performance of behaviors. Therefore, managerial disclosure beliefs are related to voluntary disclosure practices of a firm. Managerial disclosure beliefs are measured through a survey (Stratified Random Sampling) of 73 companies’ (enlisted in Dhaka Stock Exchange -DSE) CEOs with a questionnaire of 27 belief statements. Voluntary disclosures of companies are measured from annual reports (2016-2017) of the selected companies. Factor analysis is performed to reduce 27 belief statements (independent variables) to a manageable number of variables (factors). Then regression analysis is applied to investigate influential factors affecting voluntary disclosure. The results show that managerial disclosure beliefs predict more than 55 percent of the variation in the volume of both earnings and strategy disclosures. Specially, CEOs of companies who believe that disclosure of self-report, bad news, reduction of investor’s information gathering cost or reduction cost of raising capital have certain benefits disclose more than other companies. Further, CEOs of companies who believe that disclosing information to market (for example, analysts’ forecast, warning about bad news etc.) would affect market less likely to disclose information than those CEOs who do not believe. However, low disclosure companies were found to have CEOs who believe that the forecast disclosure exceeds competitive costs, forecast disclosure harm to managerial reputation, forecast disclosure exceeds union costs and strategy disclosure exceeds union costs. These results reflect the importance of managerial disclosure beliefs in explaining and predicting the nature of voluntary disclosure among companies. Keywords: Managerial Beliefs, Earnings Disclosure, Strategy Disclosure, Factor Analysis, Regression Analysis.
... A pre-request of having successful monetary policy strategy is the monetary authorities must have an accurate knowledge on the assessment of timing and effect of their policy on the economy in other word understand the relationship between operating targets and ultimate targets variables. That's means in order to conduct successful monetary policy it require an understanding of the mechanism of transmitting monetary policy through which channel monetary policy affect economy on the specific area (Mishkin 1995, Ramlogan 2006. ...
... Recently, the literature has stressed the importance of bank loans in the transmission mechanism for developing countries, mainly because the economies are dominated by many bank-dependent borrowers (Ramlogan, 2004). Also, Mishra et al. (2010) and Montiel et al. (2012provide theoretical arguments as to why BLC might be more effective in less developed countries than other channels. ...
Article
This study uses dynamic panel data estimation models, employing annual bank-level data spanning the period 2001-2011, to empirically investigate whether or not changes in the monetary policy in Tanzania influence bank lending behaviour, i.e., existence of a bank lending channel (BLC). It also examines the distributional effects of the monetary policy on banks with different balance sheet characteristics and ownership structures. The findings lend support to the hypotheses that, first: BLC operates in Tanzania, suggesting that bank loans are important channel through which monetary policy shocks are transmitted to the economy. The findings mirror the arguments that the banking sector still dominates the financial system in the country, whereas money, capital, and real estate markets are still at their infant stages. Banks account for about three-quarters of the financial sector’s assets, reflecting their dominance of sources of funding. Meanwhile, about two-thirds of bank funding comes from private sector deposits, probably constraining banks in offsetting the decrease in funds from deposits by raising funds from other sources. Second, banks react asymmetrically to policy changes influenced by size, capital strength, and ownership structure. The lending channel is stronger through domestically-owned banks and privately-owned banks than it is with foreign-owned banks and public-owned banks. The reason is that, for foreign-owned banks, they could enhance their capital through raising of equity abroad and/or benefit from retained earnings; while for public-owned banks, it could be because they are not under pressure to make profit and, therefore, may opt not to cut-down their loans following a monetary policy shock. The policy implications are that, in assessing the stance of the monetary policy, beside short-term interest rates, it is critical for the monetary authority to trace banks reaction to monetary policy changes as reflected in loan supply to the private sector. Such investigation should also factor in possible asymmetric responses by banks influenced by size, capitalization, as well as ownership structure.
... Much of the literature for the transmission mechanism in developing countries has been on close economy framework. Ramlogan (2004) found interest rate channel comparatively less important than other channels in Jamaica, Trinidad and Tobago, Barbados and Guyana. The study provided an argument that due to the underdeveloped money market in these countries the investors has to rely on banking sector to raise the funds which leads credit channel as highly contributing transmission channel in this regard. ...
Conference Paper
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The objective of this study is to investigate the relative importance of four transmission channels (i.e. interest rate, credit, exchange rate and asset price channel) of monetary policy in achieving the internal balance for a small open-economy of Pakistan. This study has employed open-economy Structural vector autoregressive (SVAR) model with non-recursive identification. This method is undertaken to analyze the effects of external shocks on the domestic macroeconomic variables and on domestic monetary policy. The shutdown method in SVAR has also been used to gauge the relative importance of each channel. The results show that foreign shocks have contractionary effects on domestic economy and monetary policy. Interest rate channel has been less important on inflation rate than asset price and credit channel, although it is found important in output variations. Exchange rate channel has been found least important in both cases of inflation and output in Pakistan. This study has found that central bank of Pakistan can only utilize interest rate channel when it targets output, whereas to control inflation rate the asset price channel is relatively more useful.
... Likewise, firms may not be inclined to increase borrowing for investment in response to lower interest rate if they do not believe the economy will rebound from a recession. For some empirical evidence, along this line, see Gertler and Gilchrist (1992), Kam and Mohsin (2006) and Ramlogan (2005). Domac and Kandil (2002) consider options to maximize the effectiveness of monetary policy using data for Germany. ...
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Using annual data, the paper studies the time-series evidence regarding the allocation of monetary growth shifts between demand components, real growth and price inflation in a sample of developing and advanced countries. The evidence reveals patterns of interaction between demand shifts and the real and inflationary effects of monetary policy. These patterns provide sharp differences in the distribution of monetary shocks across economic variables in developing and advanced countries. The paper evaluates the evidence and draws policy implications regarding potential constraints on monetary policy.
... As a result, fewer deposits are placed by the banks customers (Ford et al., 2003). Ramlogan (2004) asserts that in the money channel there are two classes of assets; money and all other assets. A reduction in the level of reserves prompts a fall in the level of deposits. ...
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The objective of this paper is to empirically explore the dynamic inter-relationships between deposits of Islamic banks with monetary policy variables in Bahrain and Malaysia covering the period from January 2001 to June 2006. Both these countries are being dubbed as the worlds' largest International Islamic Financial Hubs (Qorchi, 2005). A comparative analysis between these two countries highlights the differences and similarities of the impact of monetary policy shocks on the Islamic banks' deposits. The analysis comprises of two major testing approaches. First, the auto-regressive distributed lag (ARDL) model is used to examine the long-run relationship among the variables. Second, the vector error-correction model (VECM) is adopted to explore the short-and long-run dynamics among the variables. Compared to the Malaysian Islamic banks' deposits, the study finds that the Islamic banks' deposits in Bahrain are sensitive to monetary policy changes. This implies that the Bahraini Islamic banks are less capable to offset the de-stabilizing impact of monetary policy as compared to its Malaysian counterpart.
... This condition is unlikely to prevail when commercial banks mark-up domestic interest rates over a foreign rate. Secondly, domestic financial markets (both money and capital markets) are underdeveloped and as a result monetary policy is not likely to transmit into immediate rapid changes in short-term and long-term interest rates (Ramlogan, 2004). ...
Article
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Purpose The purpose of this paper is twofold. First, it estimates the sterilization coefficients for several Caribbean countries. Second, it contributes to the literature by providing a conceptual framework for understanding why regional economies with fully pegged exchange rate regimes have not allowed the money supply to be endogenous to capital flows. This paper notes that a high sterilization coefficient plus a de facto pegged exchange rate indicates the existence of dual nominal anchors. Design/methodology/approach The paper presents a simple theoretical model to explain this phenomenon. The model combines the liquidity preference of commercial banks with an augmented uncovered interest parity equation. Findings The econometric evidence presented shows that several Caribbean economies with fixed exchange rate regimes also possess high sterilization coefficients. Given open capital accounts in the various economies, the paper argues that this finding contravenes the money neutrality thesis, which holds that only one nominal anchor can prevail in the long term. Originality/value The model emphasizes that the interest rate formation and liquidity preference of oligopolistic commercial banks – the dominant financial institutions in a post‐liberalized setting – prevents counteracting capital movements when monetary policy changes above or along a threshold or bank mark‐up interest rate.
... Commercial banks play a pivotal role in financial intermediation and the monetary transmission mechanism in Caribbean economies (Ramlogan 2004). Providing a more global perspective, Stiglitz (1989) argued that the financial system in developing economies is likely to be dominated indefinitely by commercial banks. ...
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This study explores how shocks in the foreign exchange market influence the allocation of commercial bank assets. A consistent pattern of asset allocation was discovered for Guyanese and Jamaican commercial banks. A positive one standard deviation shock (a surplus) in the foreign exchange market results in significantly greater investments in foreign assets relative to loans to the domestic private sector. The one standard deviation shock also results in a decrease in non-remunerated excess reserves; thus signalling that the excess cash are more likely to be invested into foreign assets rather than domestic currency loans when there is a surplus of foreign currencies. The same unit shock results in a foreign exchange rate depreciation in the contemporaneous time period. That the respective currencies depreciate when there is a surplus could indicate traders hoard the surplus initially for profit taking.
... monthly, 1991:9 - Recursive VAR (i) Following a unit shock to the reverse repo, the inflation rate decelerates within two months by approximately 0.1 percent per month. (ii) There are very strong, albeit temporary, real sector effects, as real economic activity declines by approximately 2.0 percent in four months. No confidence intervals reported. Ramlogan (2004) Quarterly data; Jamaica and Barbados: 1970: 1 to 1999:4 , Trinidad and Tobago: 1970:1 to 2000:2, Guyana: 1970:1 to 1998:4 Structural VAR (i) In each country except Barbados a shock to loans accounts for over 28 per cent of the variance in output over the long run. (ii) In Barbados although credit shocks are not as important as exchange ...
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This paper surveys the evidence on the effectiveness of monetary transmission in developing countries. We summarize the arguments for expecting the bank lending channel to be the dominant means of monetary transmission in such countries, and present a simple model that suggests why this channel may be both weak and unreliable under the conditions that usually characterize those economies. Next, we review the empirical methodologies that have been employed in the recent literature to assess monetary policy effectiveness, both in developing countries as well as in industrial and emerging economies, essentially based on vector autoregressions (VARs). It is very hard to come away from this review of the evidence with much confidence in the strength of monetary transmission in developing countries. We distinguish between the 'facts on the ground' and 'methodological deficiencies' interpretations of the absence of evidence for strong monetary transmission. We suspect, however, that 'facts on the ground' are indeed an important part of the story. The fact that a wide range of empirical approaches have failed to yield evidence of effective monetary transmission in developing countries, and that the strongest evidence for effective monetary transmission has arisen for relatively prosperous and more institutionally-developed countries such as some central and Eastern European transition economies (at least in the later stages of their transition) and Tunisia, makes us doubt whether methodological shortcomings are the whole story. If this conjecture is correct, the stabilization challenge in developing countries is acute indeed, and identifying the means of enhancing the effectiveness of monetary policy in such countries is an important challenge.
... For exploring how the monetary shocks affect output and price level, we employ the VAR methodology based on Sims (1980), which has been increasingly employed in recent years in many studies (Dabla-Norris and Floerkemeir 2006, Ramlogan 2004, Morsink and Bayoumi 2001, Ahmed 2002). The chief advantage of using the standard VAR is that only minimal restrictions need to be imposed. ...
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Fiji’s central bank, the Reserve Bank of Fiji (RBF) since its inception in 1983, has been pursuing monetary policy with the mandated objectives of economic growth with price stability and an adequate level of exchange reserves. In 1988, as part of financial sector reforms, RBF discontinued the use of direct instruments and switched on to employment of indirect instruments for influencing interest rates. For the past two decades, RBF has been conducting regular open market type operations in its own paper, known as RBF Notes for liquidity management. The yield to maturity of its 91-day RBF Notes determined through tender system, known as policy indicator rate (PIR) signals the monetary policy stance of RBF. This paper undertakes an empirical study of transmission mechanism of monetary policy over a 17–year period (1990Q1-2006Q4). Using variance decomposition and impulse response analysis, we find that money channel is the most important one amongst the four channels of transmission mechanism investigated.
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Abstract This paper uses the method of structural vector autoregressions to decompose movements of real output and prices into demand and supply innovations for four Caribbean economies: Barbados, Jamaica, Trinidad and Tobago, and Guyana. The aim of the analysis is to assess if these economies could feasibly form part of a Caribbean monetary union. Correlations between the demand and supply innovations are, however, typically low, indicating that monetary union may lead to greater stabilisation problems for these economies. Copyright 2010 Blackwell Publishing Ltd.
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Purpose – Using quarterly data for a sample of 17 industrial countries, the purpose of this paper is to study asymmetry in the face of monetary shocks compared to government spending shocks. Design/methodology/approach – The paper outlines demand and supply channels determining the asymmetric effects of monetary and fiscal policies. The time‐series model is presented and an analysis of the difference in the asymmetric effects of monetary and fiscal shocks within countries is presented. There then follows an investigation of the relevance of demand and supply conditions to the asymmetric effects of monetary and fiscal shocks. The implications of asymmetry are contrasted across countries. Findings – Fluctuations in real output growth, price inflation, wage inflation, and real wage growth vary with respect to anticipated and unanticipated shifts to the money supply, government spending, and the energy price. The asymmetric flexibility of prices appears a major factor in differentiating the expansionary and contractionary effects of fiscal and monetary shocks. Higher price inflation, relative to deflation, exacerbates output contraction, relative to expansion, in the face of monetary shocks. In contrast, larger price deflation, relative to inflation, moderates output contraction, relative to expansion in the face of government spending shocks. The growth of output and the real wage decreases, on average, in the face of monetary variability in many countries. Moreover, the growth of real output and the real wage increases, on average, in the face of government spending variability in many countries. Asymmetry differentiates the effects of monetary and government spending shocks within and across countries. The degree and direction of asymmetry provide a new dimension to differentiate between monetary and fiscal tools in the design of stabilization policies. Originality/value – The paper's evidence sheds light on the validity of theoretical models explaining asymmetry in the effects of demand‐side stabilization policies. Moreover, the evidence should alert policy makers to the need to relax structural and institutional constraints to maximize the benefits of stabilization policies and minimize the adverse effects on economic variables.
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Purpose The purpose of this paper is to extend the literature on the relationship between inflation and inflation uncertainty by examining three Caribbean countries: the Bahamas, Barbados, and Jamaica. Design/methodology/approach ARMA‐GARCH models are used to estimate inflation uncertainty along with Granger‐causality tests to infer the relationship between inflation and inflation uncertainty. Findings The results reveal that both the Bahamas and Jamaica exhibit a high degree of volatility persistence in response to inflationary shocks, while Barbados has a much lower persistence measure. Granger‐causality tests indicate that an increase in inflation has been a positive impact on inflation uncertainty for each country. However, an increase in inflation uncertainty yields a decrease in inflation in the case of Jamaica. In summary, the results for the Bahamas and Barbados support the Friedman‐Ball hypothesis, whereas the results for Jamaica support Holland's stabilization‐motive hypothesis. Research limitations/implications Future research on inflation and inflation uncertainty can be extended to incorporate possible regime shifts associated with fiscal and monetary policy. Originality/value The study fills a void in the literature with respect to the inflation‐inflation uncertainty nexus for Caribbean countries. The results of the paper may be useful to policymakers in the formulation of fiscal and monetary policy.
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We consider a nonstationary vector autoregressive process which is integrated of order 1, and generated by i.i.d. Gaussian errors. We then derive the maximum likelihood estimator of the space of cointegration vectors and the likelihood ratio test of the hypothesis that it has a given number of dimensions. Further we test linear hypotheses about the cointegration vectors.The asymptotic distribution of these test statistics are found and the first is described by a natural multivariate version of the usual test for unit root in an autoregressive process, and the other is a χ2 test.
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The question of how monetary policy affects the real economy is a perennial one in macroeconomics. Over the past several decades, however, the focus of the debate has changes. Today it is taken for granted that monetary policy affects aggregate demand; what is debated is why prices do not adjust fully to compensate for shifts in demand. Thirty years ago, in contrast, sluggish price adjustment was taken for granted; what was debated was the magnitude of the effect of monetary policy on aggregate demand and the channels through which that effect occurred. This paper returns to the subject of that older literature. A fresh look at the way monetary policy affects aggregate demand is particularly timely in light of recent developments in theoretical analyses of credit markets. Work over the past 15 years has suggested that imperfections are a central feature of capital markets, and that these imperfections can cause credit allocation to be made largely on the basis of quantity rationing rather than price adjustment and can create a special role for lending by financial intermediaries. This work has also shown that credit market imperfections can have important consequences for macroeconomic fluctuations in general and for the way monetary policy is transmitted to aggregate demand in particular.
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This paper provides an overview of the monetary transmission mechanism describing the impact of changes in monetary policy on real GDP. Changes in financial market prices--including long-term interest rates and exchange rates--are the main vehicle for the transmission of policy. The framework incorporates rational expectations and policy rules. It is empirical and appears to fit the facts well. Copyright 1995 by American Economic Association.