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Peter J. Montiel - One of the best experts on this subject based on the ideXlab platform.
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Monetary Transmission in Developing Countries; Evidence from India
Monetary Policy in India, 2016Co-Authors: Prachi Mishra, Peter J. Montiel, Rajeswari SenguptaAbstract:There are strong priori reasons to believe that Monetary Transmission may be weaker and less reliable in low- than in high-income countries. This is as true in India as it is elsewhere. While its floating exchange rate gives the RBI Monetary autonomy, the country’s limited degree of integration with world financial markets and RBI’s interventions in the foreign exchange markets limit the strength of the exchange rate channel of Monetary Transmission. The country lacks large and liquid secondary markets for debt instruments, as well as a well-functioning stock market. This means that Monetary policy effects on aggregate demand would tend to operate primarily through the bank lending channel. Yet the formal banking sector is small, and does not intermediate for a large share of the economy. Moreover, there is evidence that not only are the costs of financial intermediation high but also that the banking system may not be very competitive. The presence of all these factors should tend to weaken the process of Monetary Transmission in India. This paper examines what the empirical evidence has to say about the strength of Monetary Transmission in India, using the structural vector autoregression (SVAR) methods that have been applied broadly to investigate this issue in many countries, including high-, middle-, and low-income ones. We estimate a monthly VAR with data from April 2001 to December 2014. Applying a variety of methods to identify exogenous movements in the policy rate in the data, we find consistently that positive shocks to the policy rate result in statistically significant effects (at least at confidence levels typically used in such applications) on the bank lending rate in the direction predicted by theory. Specifically, a tightening of Monetary policy is associated with an increase in bank lending rates, consistent with evidence for the first stage of Transmission in the bank lending channel. While pass-through from the policy rate to bank lending rates is in the right (theoretically expected) direction, the pass-through is incomplete. When the Monetary policy variable is ordered first, effects on the real effective exchange rate are also in the theoretically expected direction on impact, but are extremely weak and not statistically significant, even at the 90 % confidence level, for any of the four Monetary policy variants that we investigate. Finally, we are unable to uncover evidence for any effect of Monetary policy shocks on aggregate demand, as recorded either in the industrial production (IIP) gap or the inflation rate. None of these effects are estimated with strong precision, which may reflect either instability in Monetary Transmission or the limitations of the empirical methodology. Overall, the empirical tests yield a mixed message on the effectiveness of Monetary policy in India, but perhaps one that is more favorable than is typical of many countries at similar income levels.
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Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications
IMF Economic Review, 2012Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract:This paper reviews the Monetary Transmission mechanism in low-income countries (LICs). We use the standard description of Monetary Transmission as a benchmark to identify aspects of the Transmission mechanism that may operate differently in LICs. In particular, the paper focuses on the effects of financial market structure on Monetary Transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets. Consequently, traditional Monetary Transmission through market interest rates and market-determined asset prices are weak or nonexistent. The exchange rate channel, in turn, tends to be undermined by heavy central bank intervention in the foreign exchange market. The weak institutional framework also has the effect of increasing the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this induces banks to maintain chronically high excess reserves and to invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the bank lending channel also becomes impaired. These factors undermine both the strength and reliability of Monetary Transmission, which has important implications for the conduct of Monetary policy in LICs.
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Financial Architecture and the Monetary Transmission Mechanism in Tanzania
2012Co-Authors: Peter J. Montiel, Christopher Adam, Wilfred Mbowe, Stephen A. O'connellAbstract:This paper is the outcome of research collaboration between staff of the Department of Economic Research and Policy at the Bank of Tanzania and the International Growth Centre. Its objective is to develop a systematic approach to the investigation of the effectiveness of Monetary Transmission in low-income countries that can be applied specifically to the five EAC countries. In the vast majority of low-income countries, financing and political constraints have traditionally impaired the usefulness of fiscal policy as a short-run stabilization device. While fiscal dominance has also impaired the effectiveness of Monetary policy, this situation has been changing, as many low-income countries have increased the independence of their central banks. The ability of central banks to carry out this stabilization function, however, depends on the strength and reliability of the links between the policy instruments that they control and aggregate demand – i.e., on the effectiveness of Monetary Transmission. Unfortunately, this effectiveness cannot be taken for granted. Using Tanzania as a case study, Peter Montiel et al. undertake a systematic exploration of this issue.
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How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence
IMF Working Papers, 2012Co-Authors: Prachi Mishra, Peter J. MontielAbstract:This paper surveys the evidence on the effectiveness of Monetary Transmission in low-income countries. It is hard to come away from this review with much confidence in the strength of Monetary Transmission in such countries. We distinguish between the "facts on the ground" and "methodological deficiencies" interpretations of the absence of evidence for strong Monetary Transmission. We suspect that "facts on the ground" are an important part of the 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.
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How Effective is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence
2011Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract: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
Prachi Mishra - One of the best experts on this subject based on the ideXlab platform.
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Monetary Transmission in Developing Countries; Evidence from India
Monetary Policy in India, 2016Co-Authors: Prachi Mishra, Peter J. Montiel, Rajeswari SenguptaAbstract:There are strong priori reasons to believe that Monetary Transmission may be weaker and less reliable in low- than in high-income countries. This is as true in India as it is elsewhere. While its floating exchange rate gives the RBI Monetary autonomy, the country’s limited degree of integration with world financial markets and RBI’s interventions in the foreign exchange markets limit the strength of the exchange rate channel of Monetary Transmission. The country lacks large and liquid secondary markets for debt instruments, as well as a well-functioning stock market. This means that Monetary policy effects on aggregate demand would tend to operate primarily through the bank lending channel. Yet the formal banking sector is small, and does not intermediate for a large share of the economy. Moreover, there is evidence that not only are the costs of financial intermediation high but also that the banking system may not be very competitive. The presence of all these factors should tend to weaken the process of Monetary Transmission in India. This paper examines what the empirical evidence has to say about the strength of Monetary Transmission in India, using the structural vector autoregression (SVAR) methods that have been applied broadly to investigate this issue in many countries, including high-, middle-, and low-income ones. We estimate a monthly VAR with data from April 2001 to December 2014. Applying a variety of methods to identify exogenous movements in the policy rate in the data, we find consistently that positive shocks to the policy rate result in statistically significant effects (at least at confidence levels typically used in such applications) on the bank lending rate in the direction predicted by theory. Specifically, a tightening of Monetary policy is associated with an increase in bank lending rates, consistent with evidence for the first stage of Transmission in the bank lending channel. While pass-through from the policy rate to bank lending rates is in the right (theoretically expected) direction, the pass-through is incomplete. When the Monetary policy variable is ordered first, effects on the real effective exchange rate are also in the theoretically expected direction on impact, but are extremely weak and not statistically significant, even at the 90 % confidence level, for any of the four Monetary policy variants that we investigate. Finally, we are unable to uncover evidence for any effect of Monetary policy shocks on aggregate demand, as recorded either in the industrial production (IIP) gap or the inflation rate. None of these effects are estimated with strong precision, which may reflect either instability in Monetary Transmission or the limitations of the empirical methodology. Overall, the empirical tests yield a mixed message on the effectiveness of Monetary policy in India, but perhaps one that is more favorable than is typical of many countries at similar income levels.
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Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications
IMF Economic Review, 2012Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract:This paper reviews the Monetary Transmission mechanism in low-income countries (LICs). We use the standard description of Monetary Transmission as a benchmark to identify aspects of the Transmission mechanism that may operate differently in LICs. In particular, the paper focuses on the effects of financial market structure on Monetary Transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets. Consequently, traditional Monetary Transmission through market interest rates and market-determined asset prices are weak or nonexistent. The exchange rate channel, in turn, tends to be undermined by heavy central bank intervention in the foreign exchange market. The weak institutional framework also has the effect of increasing the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this induces banks to maintain chronically high excess reserves and to invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the bank lending channel also becomes impaired. These factors undermine both the strength and reliability of Monetary Transmission, which has important implications for the conduct of Monetary policy in LICs.
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How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence
IMF Working Papers, 2012Co-Authors: Prachi Mishra, Peter J. MontielAbstract:This paper surveys the evidence on the effectiveness of Monetary Transmission in low-income countries. It is hard to come away from this review with much confidence in the strength of Monetary Transmission in such countries. We distinguish between the "facts on the ground" and "methodological deficiencies" interpretations of the absence of evidence for strong Monetary Transmission. We suspect that "facts on the ground" are an important part of the 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.
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How Effective is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence
2011Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract: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
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Monetary Transmission in low income countries
IMF Working Papers, 2010Co-Authors: Peter J. Montiel, Antonio Spilimbergo, Prachi MishraAbstract:This paper reviews Monetary Transmission mechanisms in low-income countries (LICs) to identify aspects of the channels that may operate differently in LICs relative to advanced and emerging economies. Given the weak institutional frameworks, reduced role of securities markets, imperfect competition in the banking sector and the resulting high cost of bank lending to private firms, the traditional channels (interest rate, bank lending, and asset price) are impaired in LICs. The exchange rate channel is also 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.
Antonio Spilimbergo - One of the best experts on this subject based on the ideXlab platform.
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Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications
IMF Economic Review, 2012Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract:This paper reviews the Monetary Transmission mechanism in low-income countries (LICs). We use the standard description of Monetary Transmission as a benchmark to identify aspects of the Transmission mechanism that may operate differently in LICs. In particular, the paper focuses on the effects of financial market structure on Monetary Transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets. Consequently, traditional Monetary Transmission through market interest rates and market-determined asset prices are weak or nonexistent. The exchange rate channel, in turn, tends to be undermined by heavy central bank intervention in the foreign exchange market. The weak institutional framework also has the effect of increasing the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this induces banks to maintain chronically high excess reserves and to invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the bank lending channel also becomes impaired. These factors undermine both the strength and reliability of Monetary Transmission, which has important implications for the conduct of Monetary policy in LICs.
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How Effective is Monetary Transmission in Developing Countries? A Survey of the Empirical Evidence
2011Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract: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
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Monetary Transmission in low income countries
IMF Working Papers, 2010Co-Authors: Peter J. Montiel, Antonio Spilimbergo, Prachi MishraAbstract:This paper reviews Monetary Transmission mechanisms in low-income countries (LICs) to identify aspects of the channels that may operate differently in LICs relative to advanced and emerging economies. Given the weak institutional frameworks, reduced role of securities markets, imperfect competition in the banking sector and the resulting high cost of bank lending to private firms, the traditional channels (interest rate, bank lending, and asset price) are impaired in LICs. The exchange rate channel is also 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.
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Monetary Transmission in low income countries
2010Co-Authors: Prachi Mishra, Peter J. Montiel, Antonio SpilimbergoAbstract: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.
John B. Taylor - One of the best experts on this subject based on the ideXlab platform.
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alternative views of the Monetary Transmission mechanism what difference do they make for Monetary policy
Oxford Review of Economic Policy, 2000Co-Authors: John B. TaylorAbstract:This paper examines how alternative views of the Monetary Transmission mechanism affect the choice of a Monetary policy rule. The main finding is that many different structural models indicate that the same simple Monetary policy rule--one in which the central bank's target short-term interest rate reacts to inflation and to real output--would perform well. Such rules work well even in models where the Monetary Transmission mechanism has a relatively strong exchange-rate channel. The models differ, however, in their implications for more complex Monetary rules. Copyright 2000 by Oxford University Press.
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The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules
2000Co-Authors: John B. TaylorAbstract:This paper shows that different models of the Monetary Transmission mechanism lead to surprisingly similar choices about Monetary policy rules. In particular, simple rules in which the interest rate reacts to inflation and real output seem to be robust to many different views about how Monetary policy works. In models of small open economies—where the Monetary Transmission mechanism has a relatively strong exchange rate channel—the policy rule should also adjust to the exchange rate, but the gains from such exchange rate rules over rules that react only to inflation and output are small. The results suggest the need for more research on both the effect of exchange rate fluctuations and on policy rules that take account of exchange rates.
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the Monetary Transmission mechanism an empirical framework
Journal of Economic Perspectives, 1995Co-Authors: John B. TaylorAbstract: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.
Petya Koeva Brooks - One of the best experts on this subject based on the ideXlab platform.
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Does the Bank Lending Channel of Monetary Transmission Work in Turkey
2007Co-Authors: Petya Koeva BrooksAbstract:Does the bank lending channel of Monetary Transmission work in Turkey? Using the May- June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of Monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's Monetary Transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of Monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.
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The Bank Lending Channel of Monetary Transmission: Does it Work in Turkey?
IMF Working Papers, 2007Co-Authors: Petya Koeva BrooksAbstract:Does the bank lending channel of Monetary Transmission work in Turkey? Using the May-June 2006 financial turbulence as an exogenous shock that prompted a significant tightening of Monetary policy, this paper examines the loan supply response of Turkey's banks, depending on their balance sheet characteristics. The empirical results indicate that banks can play a role in Turkey's Monetary Transmission mechanism. Specifically, bank liquidity is found to have a significant effect on loan supply in Turkey. This suggests that the effect of Monetary policy in Turkey can be propagated by the banking sector, depending on its liquidity position.