Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

By Sanchita Mukherjee, Rina Bhattacharya

October 1, 2011

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Sanchita Mukherjee, and Rina Bhattacharya. Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies, (USA: International Monetary Fund, 2011) accessed December 3, 2024

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

Summary

In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries.

Subject: Deposit rates, Emerging and frontier financial markets, Financial markets, Financial sector development, Financial services, National accounts, Private consumption, Private investment

Keywords: Africa, Consumption growth, Deposit rates, Emerging and frontier financial markets, Financial market development, Financial sector development, Inflation targeting, Inflaton targeting, Interest rate, Interest rate channel, Interest rate elasticity, Interest rate sensitivity, Investment, Investment equation, Mena EMEs, Monetary policy, Private consumption, Private investment, Substitution effect, WP

Publication Details

Pages:

27
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/229
Stock No:

WPIEA2011229
ISBN:

9781463921293
ISSN:

1018-5941

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