Monetary Policy Transmission Mechanisms in Pacific Island Countries

By Jonathan C Dunn, Matt Davies, Yongzheng Yang, Yiqun Wu, Shengzu Wang

April 1, 2011

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Jonathan C Dunn, Matt Davies, Yongzheng Yang, Yiqun Wu, and Shengzu Wang. Monetary Policy Transmission Mechanisms in Pacific Island Countries, (USA: International Monetary Fund, 2011) accessed December 21, 2024

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

Summary

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.

Subject: Central bank policy rate, Conventional peg, Credit, Exchange rate arrangements, Inflation

Keywords: Broad money, Exchange rate regime, Fiscal policy coordination, Monetary policy transmission, Policy rate, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/096
Stock No:

WPIEA2011096
ISBN:

9781455254279
ISSN:

1018-5941

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