Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia

By Jaromir Benes, Andrew Berg, Rafael A Portillo, Mai Dao, Alfredo Baldini

April 1, 2012

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Jaromir Benes, Andrew Berg, Rafael A Portillo, Mai Dao, and Alfredo Baldini. Monetary Policy in Low Income Countries in the Face of the Global Crisis: The Case of Zambia, (USA: International Monetary Fund, 2012) accessed November 23, 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

We develop a DSGE model with a banking sector to analyze the impact of the financial crisis on Zambia and the role of the monetary policy response. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country’s risk premium, and a decrease in the risk appetite of local banks. We characterize monetary policy as "stop and go": initially tight, subsequently loose. Simulations of the model broadly match the path of the economy during this period. We find that the initial policy response contributed to the domestic impact of the crisis by further tightening financial conditions. We study the factors driving the "stop" part of policy and derive policy implications for central banks in low-income countries.

Subject: Banking, Commercial banks, Credit, Financial institutions, Inflation, International trade, Monetary base, Money, Prices, Terms of trade

Keywords: Broad money, Commercial banks, Credit, Global, Global Financial Crisis, Inflation, Low-Income Countries, Monetary base, Monetary policy, Monetary policy error, Monetary policy response, Monetary policy rule, Monetary policy shock, Monetary policy stance, Nominal exchange rate, T-bill rate, Terms of trade, WP, Zambia

Publication Details

Pages:

47
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/094
Stock No:

WPIEA2012094
ISBN:

9781475502848
ISSN:

1018-5941

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