Transmission mechanisms for monetary policy in emerging market economies
Abstract
This volume, which is a follow-up to BIS Policy Paper No 3 (January 1998), analyses the major changes in monetary policy transmission in the emerging market economies (EMEs) over the past decade and highlights a number of implications. It is based on two days of discussions among senior central bankers at a meeting at the BIS in December 2006. Fiscal dominance has been largely overcome and monetary policy frameworks are now more credible. The overview paper finds that central banks have become more flexible in their operations. The interest rate channels of monetary policy have become much stronger, and the relative importance of some of the traditional channels such as the credit channel has declined, at least in normal times. Better monetary policies have resulted in lower and less volatile inflation in most EMEs. An analysis of the transmission of monetary policy to longterm interest rates notes that the impact of the policy rates on long-term rates has been moderated by more stable inflation expectations, which has allowed central banks to be less aggressive in adjusting policies. External factors appear to be exerting an increasing influence on domestic long-term rates. A related analysis finds that greater globalisation has resulted in domestic short-term rates being significantly affected by foreign interest rates, particularly in countries with high capital mobility and with managed exchange rates. Finally, the pass-through from exchange rate changes to domestic inflation has fallen since 2001, while the sensitivity of inflation to foreign price changes has increased.
... 4 The paper uses the concept of the managed float, rather than the full-float, as the better representation of the present exchange-rate regime in Thailand. 5 'Arguably' according to the Bank of Thailand annual reports published around this time and the Bank of Thailand (2008). Section 5 of this paper details an investigation of money-demand behaviour and its stability in Thailand. ...
This paper deploys Thai quarterly data for the study period 1999q1–2014q4 to econometrically investigate the proposition that money growth is an important, if not the sole, determinant of inflation under inflation targeting and that the money growth-inflation relation is not conditional on the stability of the money-demand function. The autoregressive distributed-lag (ARDL) bounds-testing results suggest that, across the study period, the Thai money stock (narrow or broad), real output, prices, interest rates and exchange rates maintained a long-run equilibrium relationship. The associated error-correction model of inflation confirms the cointegral relationship among money (narrow or broad), real output, prices, interest rates and exchange rates. It also suggests that money growth has a significant distributed-lag impact on inflation. The presence of this money growth-inflation relationship was associated with a stable narrow money-demand function, whereas the broad money-demand function remained unstable. These results for the study period are consistent with the view that the causal relationship between money growth and inflation holds in Thailand under inflation targeting when the Bank of Thailand deploys a short-term policy interest rate, rather than a monetary aggregate, as the instrument of monetary policy and that this relationship is not conditional on the stability of the money-demand function.
... In such condition smaller companies are forced to lower their R&D costs, as well as, to cut jobs. Conventional monetary policy transmission originally refers to interest rate channel and focuses on the direct effects of the monetary policy [2]. Monetary policy creators use the leverage over the short term nominal interest rate to influence the cost of capital and subsequently the purchase of durable goods and firm investment [23]. ...
In this paper we analyzed the liquidity of the companies, the plans for the future cash flows and questions related to the new law regarding the financial discipline. Main questions addressed here are the number of difficulties related to the sources of financing the current and the developing activities of the companies in Macedonia. The analysis is undertaken by using statistical techniques and models. The results suggest that in the post-crisis period the companies are facing with number of difficulties of providing financial resources for the current and the developing activities where the most significant source of finance are the bank credits. Also, the results suggest that delayed payment of claims, the legislative and the high level of interest rate are the most common factors that restrict the access to finance of the Macedonian companies.
This paper aims to contribute to the meager literature on monetary policy effectiveness in Tunisia especially after the revolution of January 2011; a period during which the country entered a delicate democratization transition. On the basis of a monthly data of several macroeconomic variables during the period from 2000 through 2013 a Vector Error Correction (VEC) model is estimated. The VEC- generated impulse response functions show that the monetary policy stance, as measured by the short-term interest rate, has become increasingly more effective on real output and prices during the post-revolution period; i.e., (2011 – 2013) than the previous period; i.e., (2000 – 2010). The variance decomposition analysis not only confirms these findings but also it points out an increasing role to the real output in price variation during the political transitional period. This might be attributed to the increasing volatile environment that characterized this period, which perturbed the aggregate supply and exacerbated the aggregate demand. Another no less important finding uncovered by the model is the amplification and acceleration of the exchange rate pass-through during the transitional period with respect the pre-revolution period.
1. The institutional and structural aspects of the monetary transmission mechanism in Estonia 1.1. The set-up of the monetary system In Estonia, the currency board arrangement (CBA) was introduced together with the monetary reform of 1992. The Law on the Security for the Estonian Kroon sets the legal framework of CBA principles. This legislation enforces all essential principles of CBA: i) Kroon exchange rate determination with respect to the German mark 48 ; ii) Prohibition of devaluing the Estonian Kroon; iii) Requirement for full backing of issued kroons (i.e. currency in circulation and deposits held in Bank of Estonia) with convertible foreign currencies and gold; iv) Guarantee for full convertibility of kroons at the official rate; v) Requirement that the Bank of Estonia issue kroons only against corresponding changes in foreign reserves. As we can see, the Law on the Security for the Estonian Kroon implements the CBA in quite an orthodox form in Estonia. However, the currency board is institutionally not separated from the central bank. According to the central bank law, the Bank of Estonia is responsible for typical central bank duties. The institutional unification of CBA principles and other central bank duties does not, however, mean any weakening in the enforcement of CBA principles in Estonia, as the most fundamental of them are guaranteed by the Law (See also Lättemäe, Randveer and Sepp 2002). In implementing its tasks, the Bank of Estonia is independent from all government agencies. Any lending to the government by the Bank of Estonia is prohibited and the bank is not liable for the state's financial obligations. Although the scope for possible discretionary monetary policy is limited by the amount of excess reserves of the central bank, the Bank of Estonia has, in practice, followed rather orthodox rules-based principles for the CBA. Most of the time the only channel for base-money issuance is transactions at the central bank forex window, assuring that money supply only adjusts according to changes in the central bank's foreign reserves (See Figure 1.1). There are a few rare exceptions, where the central bank has injected additional liquidity into the financial sector, due to a specific need to avoid excessive systemic risk in the financial system. In other words, there is no active monetary policy in Estonia, but discretionary actions in extreme situations are not explicitly ruled out.
We develop and estimate a medium-size, semi-structural model for Brazil's economy during the inflation targeting period. The model captures key features of the economy, and allows us to investigate the transmission mechanisms of monetary policy. We decompose the monetary channels into household interest rate, firm interest rate, and exchange rate channels. We find that the household interest rate channel plays the most important role in explaining output dynamics after a monetary policy shock. In the case of inflation, however, both the household interest rate and the exchange rate channels are the main transmission mechanisms. Furthermore, using a proxy for an expectation channel, we also find that this channel is key in the transmission of monetary policy to inflation.
During the last 3 and half years Bank of Albania has produced a vast literature on the characteristics of Albanian monetary policy, its transmission mechanism and possible future developments. The center of this research is the new setup of monetary policy as the Bank of Albania prepares to depart from its current regime of monetary targeting and most probably adopt an inflation targeting regime. While the shift implied by such terminology involves substantial change in the model and implementation of monetary policy, in practice this is less so. Broadly speaking, the operational procedures and the decision making process of the current policy are not different from implicit inflation targeting regime. This paper will not appraise or justify the reasons which motivate such change, but will discuss several important challenges that monetary policy might face in this new phase and suggest possible solutions when possible. This material builds upon existing empirical literature and uses it to identify potential challenges to monetary policy.
This paper reviews trends in capital flows in Latin America and the Caribbean between 2003 and mid-2008 and its implications for monetary policy and financial stability. The financing structure that emerged during this period was more benign than in the past, due to a greater share of foreign direct investment and reduced reliance on foreign financing. Although traditional monetary policy trade-offs remained present, policy implications shifted partly due to changes in the monetary transmission mechanism. Financial stability focus on currency and maturity risk shifted to focus on credit, liquidity and market risk.
Governors and senior officials representing some two dozen central banks from Africa and other regions of the world met at the BIS in May 2011 to discuss the monetary policy and financial stability issues facing Africa after the global financial crisis. This volume brings together the background papers prepared for that meeting. The papers cover four broad areas where the crisis could have had potentially the largest impact on central banking in Africa: (i) financial access; (ii) governance arrangements for financial stability; (iii) changes in monetary policy transmission mechanisms; and (iv) capital flows, commodity prices and exchange rates. An overview chapter summaries the main points raised in the discussions and in the background papers. A special feature of the volume are the opening remarks on financial inclusion and the regulation of micro-finance, followed by a transcript of the question and answer session with Professor Muhammad Yunus, the 2006 Nobel Peace Prize laureate.
This paper evaluates the demand for broad money (M2) in The Gambia for January 1988-June 2007. There appears to be a long-run relationship for demand for real M2, but the relationship is not stable. Exogenous output shocks, financial innovation, changes in income velocity, and inadequate data quality contribute to the instability. The authorities may need to apply the monetary targeting regime flexibly in the overall objective of preserving price stability. A possible option for The Gambia is to become an inflation targeter lite.
Numerous empirical studies have found that the strength of the interest rate pass-through varies markedly across countries and markets. The causes of such heterogeneity have attracted considerably less attention so far. Unlike other studies that mainly focus on small groups of mostly developed and emerging markets in the same region, this paper expands the cross-sectional coverage to 70 countries from all regions, including low income, emerging and developed countries. It uses a wide range of macroeconomic and financial market structure variables to uncover structural determinants of pass-through. The paper finds that per capita GDP and inflation have positive effects on pass-through, while market volatility has a negative effect. Among financial market variables exchange rate flexibility, credit quality, overhead costs, and banking competition were found to strengthen pass-through, whereas excess banking liquidity to impede it.
This paper analyzes the extent to which ASEAN may be suitable for a regional monetary arrangement. On the economic front, we review evidence on patterns of trade, economic shocks, the extent of factor mobility, and the monetary transmission mechanism. We find that ASEAN today is less suitable for a regional monetary arrangement than the Euro area was before the Maastricht Treaty, but the differences are not large. On the political front, we analyze the prerequisites for monetary integration in light of 50 years of European experience. We conclude that a firm political commitment would be key to ensuring that an attempt to form a regional monetary arrangement is not viewed as simply another fixed exchange rate system open to speculative attack. That commitment would have to be strong enough to survive for an extended period and to support difficult decisions such as rendering the central bank independent, adhering to fiscal and exchange rate arrangements even if the policy stance conflicts with that which would be adopted on the basis of purely domestic considerations, and accepting supranational directives. These are very considerable prerequisites for success. J. Japan. Int. Econ., June 2000, 14(2), pp. 121–148. International Monetary Fund; University of California, Berkeley; and International Monetary Fund. Copyright 2000 Academic Press.Journal of Economic Literature Classification Numbers: F33, F36, F41, F42.
An essential condition of the effectiveness of price-stability-based monetary regime is availability of an efficient mechanism for transmission of monetary policy impulses to the real sector of economy. Characteristic of the economy of Ukraine, the same as many other transition economies is the existence of institutional and structural factors that reduce the effectiveness of monetary transmission mechanism. This paper discusses the above mentioned factors and measures aimed to strengthen the efficiency of transmission mechanism of monetary policy.
This paper exploits a panel dataset comprising 1,565 banks in 20 emerging countries during 1989- 2001 and compares the response of the volume of loans and the rates on loans and deposits to various measures of monetary conditions across domestic and foreign banks. It also looks for systematic differences in the behavior of domestic and foreign banks during periods of financial distress and tranquil times. Using differences in bank ownership as a proxy for financial constraints, the paper finds weak evidence that foreign banks have a lower sensitivity of credit to monetary conditions relative to their domestic competitors, with the differences driven by banks with lower asset liquidity and/or capitalization. The lending and deposit rates of foreign banks tend to be smoother during periods of financial distress. However, the differences across domestic and foreign banks do not appear to be strong. These results provide weak support to the existence of supply-side effects in credit markets and suggest that foreign bank entry in emerging countries may have contributed somewhat to stability in credit markets.
Este artículo revisa las políticas cambiarias pasadas en Chile, poniendo particular énfasis en el sistema de tipo de cambio flotante y los dos episodios en que el Banco Central ha intervenido en él. Presenta evidencia de las condiciones favorables de Chile para enfrentar los shocks cambiarios: un sector financiero bien desarrollado que ofrece oportunidades de cobertura para que el sector empresarial reduzca su vulnerabilidad a través de efectos sobre el balance contable; y un nivel bajo y decreciente de traspaso desde el tipo de cambio a los precios. Así, ayuda a recortar los costos del régimen flotante, reduciendo la amenaza implícita en términos financieros y de inestabilidad de precios, y por lo mismo evitando el miedo a flotar. Además, provee suficiente credibilidad al actual sistema cambiario, y refuerza el compromiso con dejar las intervenciones para muy contadas ocasiones.
This note presents estimates of the pass-through of exchange rate changes and import price changes (measured in foreign currency) into domestic inflation in a group of 13 emerging market economies. The note focuses on the variation in the pass-through elasticities across and within countries, and on their evolution during the 1980s and 1990s. The model and estimation methods used are very simple and are intended to illustrate how the pass-through effects can be analysed with only a few data series in a "bare bones" framework that could be easily replicated by analysts and interpreted by policymakers in the emerging market economies. The main findings are as follows: Changes in exchange rates are more strongly and more contemporaneously correlated with inflation than are changes in import prices. There is also some evidence of statistical causality running from exchange rate changes to inflation and, in several countries, from import price changes to inflation. Import price and exchange rate elasticities of inflation are approximately the same in four countries in the sample. In two countries the import price elasticity is higher, and in seven countries the exchange rate elasticity is higher. These results indicate that the approach followed in most of the literature, whereby the pass-through effect is estimated from import prices in domestic currency, may not be appropriate. Rather, it seems necessary to analyse the two pass-through effects separately. Cross-country differences in the size of pass-through coefficients are large and seem to be related to the volatility - but not the persistence - of inflation. The pass-through from exchange rate changes into inflation has generally been stronger than the pass-through from import prices, but has declined since the mid-1990s, probably as a result of more stable macroeconomic conditions and structural reforms implemented in the emerging economies. The next section describes the data and the estimating framework used. The third section analyses the results of the regressions, and the fourth section provides tentative interpretations of the results.
There has been a considerable recent debate on the causes of low pass-through from exchange rates to consumer prices. This paper develops a simple model of a small open economy in which exchange rate pass-through is determined by the frequency of price changes of importing firms. But this, in turn, is determined by the monetary policy rule of the central bank. 'Looser' monetary policy, which implies a higher mean inflation rate, and a higher volatility of the exchange rate, will lead to more frequent price changes and a higher rate of pass-through. The model implies that there should be a positive, but nonlinear, relationship between pass-through and mean inflation, and a positive relationship between passthrough and exchange rate volatility. In a sample of 122 countries, this is strongly supported by the data. Our conclusion is that, at least partly, low exchange rate pass-through is a result of short-term price rigidities.
Developing countries traditionally experience pass-through of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors’ products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of pass-through and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete pass-through is no longer exclusively a luxury of industrial countries. Using a new data set—prices of eight narrowly defined brand commodities, observed in 76 countries—we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the pass-through coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in pass-through to imported goods prices, and in turn to competitors’ prices and the CPI, can be explained by changes in the monetary environment—including a fall in long-term inflation. Real wages work to reduce pass-through to competitors’ prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the pass-through coefficient in some developing countries.
Recently there has been a significant decline in the degree to which firms ‘pass through’ changes in costs to prices, a decline that is frequently characterized as a reduction in the ‘pricing power’ of firms. The decline appears to be associated with the decline in inflation in many countries. The decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation. Some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the United States in the late 1990s. This paper puts forth the view that the decline in pass-through or pricing power is due to the low inflation environment that has recently been achieved in many countries. First, a microeconomic model of price setting is used to show that lower pass-through is caused by lower perceived persistence of cost changes. Evidence is then presented showing that inflation is positively correlated with persistence of inflation, suggesting that the low inflation itself has caused the low pass-through. An economy-wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways, but can disappear quickly if monetary policy and expectations change.
This paper argues that the primary force behind the large fall in real exchange rates that occurs after large devaluations is the slow adjustment in the price of nontradable goods and services. Our empirical analysis is based on data from four large devaluation episodes: Mexico (1994), Korea (1997), Brazil (1999), and Argentina (2001). We conduct a more detailed analysis of the Argentina case using disaggregated CPI data, data from our own survey of prices in Buenos Aires, and scanner data from supermarkets. We then construct an open economy general equilibrium model that can account for the slow adjustment in nontradable good prices after a large devaluation
The country’s central bank has a profound impact on the lives of all residents in the country. This paper attempted to put some policy issues on central banking in the country in certain perspectives so that policy debates on these issues can proceed with greater focus. More specifically, it examined central banking in the Philippines from three perspectives – the past, the present and the future. First, it took a fresh look at central banking in the Philippines in the last 25 years. This period, which covers 5 administrations and 6 central bank governors, is the most turbulent period in the history of central banking in the Philippines. Second, the paper examined the way the Bangko Sentral ng Pilipinas (BSP) currently conducts monetary policy, highlighting the BSP’s shift to inflation targeting as its monetary policy framework and the issues it must confront to make it successful. Third, it discussed the future of central banking in the Philippines, taking into account three major trends that are currently sweeping around the world, namely, the separation of bank supervision function from monetary policy function of central banks, increasing regional economic and financial integration, and the revolution in the payments system brought about by rapid changes in information and communications technology. These factors can lead to changes in the fundamental character of the country’s central bank in the future.
This paper studies a particular aspect of the choice of exchange rate regime by EU candidate countries in the run-up to membership of European Economic and Monetary Union (EMU). The fact that these countries have adopted various exchange rate systems reflects a divergence of opinion on the appropriate way to handle macroeconomics and, in particular, to curb inflation. This paper studies the connection between changes in the exchange rate and inflation as perceived in various exchange rate systems in order to draw conclusions with regard to the possible role of exchange rate management in achieving and maintaining low inflation in these countries. To this end we model price and exchange rate changes simultaneously and incorporate adjustment towards the equilibrium real exchange rate. We use a state-space model and the Kalman filter to infer unobserved variables and time-varying parameters. Dieses Papier untersucht einen besonderen Aspekt bei der Wahl eines Wechselkursregimes von EU Beitrittskandidaten auf dem Weg zu einer Mitgliedschaft in der Europäischen Wirtschafts- und Währungsunion. Die Tatsache, dass diese Länder verschiedene Wechselkursregime gewählt haben, deutet auf divergierende Ansichten darüber hin, wie die Wirtschaftspolitik geführt werden soll und insbesondere, wie die Inflation gesenkt werden soll. In diesem Aufsatz werden die Beziehungen zwischen Änderungen in den Wechselkursen und den Preisen in verschiedenen Wechselkursregimen untersucht. Dabei soll herausgefunden werden, welche Rolle Wechselkurse spielen, wenn es darum geht, niedrige Preissteigerungsraten zu realisieren und diese dann auch beizubehalten. Preis- und Wechselkursänderungen werden simultan modelliert unter gleichzeitiger Berücksichtigung der Anpassung an einen Gleichgewichtwechselkurs. Raum-Zustands-Modelle und Kalmanfilter werden verwendet, um auf unbeobachtete Variablen und zeitvariable Parameter schließen zu können.
This paper examines the degree of Exchange Rate Pass-Through (ERPT) to prices in 12 emerging markets in Asia, Latin America and Central and Eastern Europe. The results, based on three alternative vector autoregressive models, partly overturn the conventional wisdom that ERPT into both import and consumer prices is always higher in ‘emerging’ than in ‘developed’ countries. For emerging markets with only one digit inflation (most notably the Asian countries), pass-through to import and consumer prices is found to be low and not very dissimilar from the levels of developed economies. The paper also finds robust evidence for a positive relationship between the degree of the ERPT and inflation, in line with Taylor’s hypothesis once two outlier countries—Argentina and Turkey— are excluded from the analysis. Finally, the presence of a positive link between import openness and ERPT, while plausible theoretically, finds only weak empirical support.
This paper investigates the question of whether a transition to a low-inflation environment, induced by a shift in monetary policy, results in a decline in the degree of pass-through of exchange rate movements to consumer prices. It differs from previous empirical work in its focus on the identification of changes in the inflation environment and its use of a panel-data approach. Evidence from a panel-data set of 11 industrialized countries over the period from 1977 to 2001, supports the hypothesis that exchange rate pass-through declines with a shift to a low-inflation environment brought about by a change in the monetary policy regime. More specifically, the results suggest that pass-through to import, producer, and consumer price inflation declined following the inflation stabilization that occurred in many industrialized countries in the early 1990s but did not decline following a similar episode in the 1980s. Several potential explanations for this finding are discussed, including the possibility that changes in the monetary policy regimes implemented in the 1990s were perceived as more credible than those carried out in the 1980s, and the possibility that the credibility of the new monetary policy regimes was acquired over time.
Since May 2000, the Bank of Thailand adopted inflation targeting as its monetary framework, making price stability the overriding policy objective. Understanding the inflation transmission mechanism is therefore crucial in policy assessment and decision-making. Of particular concern are the key determinants of inflation in Thailand and their relative importance over time. Given the pervasive influence of the exchange rate in the economy, the paper employs econometric models to measure the pass-through of exchange rate movements to domestic prices. In doing so, it evaluates whether the degree of pass-through varies across sectors. Reasons that explain the weak exchange rate pass-through include: 1) changes in firms' pricing strategy, 2) lower inflation expectations, 3) shifts in housing market structure, and 4) prevalence of administered price measures. The low pass-through has provided more room for manoeuvre in monetary policy. As the pass-through depends on not only the share of import content but also the exchange rate volatility, large fluctuations in the exchange rate can still pose a threat to the inflation target.
The pass-through of exchange rate changes into domestic inflation appears to have declined in many countries since the 1980s. We develop a theoretical model that attributes the change in the rate of pass-through to increased emphasis on inflation stabilization by many central banks. This hypothesis is tested on 20 industrial countries between 1971 and 2003. We find widespread evidence of a robust and statistically significant link between estimated rates of pass-through and inflation variability. We also find evidence that observed monetary policy behaviour may be a factor in the declining rate of pass-through. Published in 2004 by John Wiley & Sons, Ltd.
In the past decade, inflation in Australia and most other industrialised countries has been extremely well behaved. An important question is whether this reflects a series of favourable shocks to prices or a more fundamental change in the inflation process. In this paper, we explore developments in each of the key explanators of inflation. We find that some of the determinants of inflation in Australia have exhibited unusual or structural change in recent years. Using a mark-up model of inflation, we attempt to identify whether there has been a change in the relationship between inflation and its determinants. We find some tentative evidence of change. Although this change is not statistically significant, it may be economically significant. It leaves open the possibility that some forces may be emerging that could help reduce the variability of inflation in response to shocks.
This paper attempts to aggregate and summarise fresh results concerning the monetary transmission mechanism in Hungary. Within a research project at the MNB nine studies have been published investigating the channels through which Hungarian monetary policy affects the economy. We create a framework for synthesising particular results based on Mishkin’s (1996) classification. We analyse how aggregate demand is affected through those channels. Our conclusion is that during the past ten years monetary policy did exert a measurable influence on real activity and prices. The dominance of the exchange rate channel explains why prices respond faster and output responds more mildly than in closed developed economies like the U.S. or the euro area. We expect that after adopting the euro the absence of exchange rate will be compensated by the fact that the interest rate channel will work through foreign demand as well. Therefore, no significant asymmetries can be expected inside the euro area in terms of monetary transmission.
This paper examines the performance of a variety of new open economy macroeconomic models in explaining the exchange rate pass-through in a wide range of prices. Quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock. Predicted responses are compared with the evidence based on VAR models to examine how well different models fit the data. The results show that the best-fitting model incorporates a number of features highlighted by different strands of the literature: sticky prices, sticky wages, distribution costs and a combination of local (LCP) and producer currency pricing (PCP). (c) 2004 Elsevier B.V. All rights reserved.
This paper analyzes the degree to which fluctuations in the nominal exchange rate passthrough to consumer prices in South Africa. While the average pass-through is found to be low, evidence from a structural vector autoregression suggests it is much higher for nominal (versus real) shocks. Historical decompositions suggest that the nominal exchange rate depreciation up to November 2001 is attributable primarily to negative real shocks, which explains why CPIX (consumer price index excluding interest on mortgate bonds) inflation did not increase significantly until December 2001, when positive nominal shocks began to contribute to the depreciation.
This paper compares the response of inflation to changes in exchange rate competitiveness in various regions of the world. The paper first presents evidence that an empirical relationship between the rate of inflation and the level of the real exchange rate holds for a large set of countries. It then demonstrates that the responsiveness of inflation to the real exchange rate has been much higher in Latin America than in Asian or industrialized countries. This difference in inflationary responsiveness is not fully explained either by the prior history of inflation or by the extent of openness to foreign trade. Copyright © 2003 John Wiley & Sons, Ltd.
This paper surveys recent advances in empirical studies of the monetary transmission mechanism (MTM), with special attention to Central and Eastern Europe. In particular, while laying out the functioning of the separate channels in the MTM, it explores possible interrelations between different channels and their impact on prices and the real economy. The empirical findings for Central and Eastern Europe are then briefly compared with results for industrialized countries, especially for the euro area. We highlight potential pitfalls in the literature and assess the relative importance, and potential development, of the different channels, emphasizing the relevant asymmetries between Central and Eastern European countries and the euro area.
Exxon Mobil and ConocoPhillips stock price has been predicted using the difference between core and headline CPI in the United States. Linear trends in the CPI difference allow accurate prediction of the prices at a five to ten-year horizon.
In this paper, we use cross-county and time series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods, as well as to non-traded goods. We highlight three reasons for changing pass through at the level of retail prices of goods. First, pass through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is whether there have been changing sector expenditures on distribution services, with the direction of change negatively correlated with pass through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods.
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
There are two important aspects to consider in evaluating the transmission of monetary policy. The first is the transmission from the instruments directly under the central bank's control (eg, short-term interest rates or reserve requirements) to variables that most directly affect conditions in the non-financial sector (loan rates, deposit rates, asset prices and the exchange rate). The second is the link between financial conditions and the spending decisions of both households and firms. Financial globalization in recent years has affected the monetary transmission mechanism, either by changing the overall impact of policy or by altering the transmission channels. The liberalization of capital accounts alongside technological advances and the emergence of increasingly sophisticated financial products have posed new macroeconomic challenges for central banks in industrial and emerging market economies alike with regard to monetary policy implementation. Increased offshore borrowing and the internationalization of the local currency effectively reduces firms' exposure to domestic credit-market conditions and acts to limit the impact of monetary policy on aggregate demand. Meanwhile, the structural changes associated with the globalization process increase not only the uncertainty with respect to the monetary transmission mechanism, but also the transmission mechanism itself, which changes systematically as globalization leads to open capital markets. In light of this development, understanding the transmission mechanism of monetary policy has become one of the pressing issues for policymakers and researchers in recent years. The liberalization of the Philippine financial system during the early 1990s paved the way for the introduction of financial instruments that had a significant impact on the conduct of monetary policy. This development resulted in the weakening of the traditional link (as posited in a monetary aggregate targeting framework) between money on the one hand and output and inflation on the other. Due to the difficulty in attaining monetary targets because of the growing instability in this relationship, the Bangko Sentral ng Pilipinas (BSP) shifted to inflation targeting as the framework for monetary policy in 2002 to put more emphasis on price stability and less weight on intermediate monetary targets.
The relationship between exchange rates and inflation targeting revisited”, University of California, Los Angeles, September. rBIS Papers No 35 129 Égert,Equilibrium exchange rates in transition economies: taking stock of the issues
- S B Edwards
- L Halpern
- R Macdonald
Edwards, S (2005): “The relationship between exchange rates and inflation targeting revisited”, University of California, Los Angeles, September. rBIS Papers No 35 129 Égert, B, L Halpern and R MacDonald (2006): “Equilibrium exchange rates in transition economies: taking stock of the issues”, Journal of Economic Surveys Vol 20, No 2, 257–324. Also CEPR Discussion Paper No 4809