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Macro Research for Development: An IMF-DFID Collaboration

Topic 1: Monetary and Exchange Rate Policies in Low-Income Countries (LICs)

Last Updated: July 28, 2017

As a result of external shocks, ranging from the food and fuel crisis of 2007–2008 to the global financial crisis of 2008–2009, LICs have seen large swings in inflation that raise questions about current monetary and exchange rate polices.

IMF-UK Department for International Development Workshop

At the same time, policymakers are reexamining the usefulness of money targeting frameworks as tools to anchor inflation expectations, signal the stances of policymakers, and reduce volatility. As a result, many LICs are looking to implement more active and forward-looking monetary policies. A small number have already adopted elements of inflation forecast targeting (IFT); others are considering moving in that direction on the grounds that it will enrich central banks' understanding of why inflation may currently be deviating from the target and identify the policy decisions that will bring the inflation forecast back in line.

In this context, the IMF/DFID partnership is undertaking a vast project on monetary policy in LICs. The project aims to:

  • Generate high quality research on this topic and

  • Collaborate closely with selected central banks in sub-Saharan Africa in their efforts to modernize the practice of monetary policy in the region, drawing on the ongoing research and the experience in other countries.

Research on Monetary Policy

On the research side, our goal is to advance the understanding of existing regimes as well as the macroeconomic environment in which monetary policy operates. The topics being covered so far are diverse (See Collaboration for a list of visiting scholars and associated topics. reflecting the many questions that remain unexplored in the literature.

Some of the research is of a practical nature. For example, Andrle and others (2013) develop a forecasting and policy analysis system (FPAS) specifically for sub-Saharan African (SSA) countries. The model explicitly assigns a central role to food prices and their relation to global developments to analyze the dynamics of inflation. The authors apply the model to Kenya, which is representative of the challenges SSA countries have faced in recent years (see box 3.1). In the case of Kenya, while fluctuations in international food prices caused part of the country's large swings in inflation, monetary policy may have also had a role. Andrle et al. (2013) use the FPAS to determine the extent to which monetary policy decisions and other domestic factors have affected inflation in Kenya.

Kenya: Headline inflation (demeaned), shock decomposition, 2005:1-2011:3

While fluctuations in international food prices (represented by the blue columns) caused part of Kenya's large swing in inflation, monetary policy (green columns) also played a role.

Along with this very practical work, more basic research is underway to better understand aspects of the transmission mechanism, e.g., the role of the financial system in transmitting external shocks and policy more generally (see IMF WP 12/94 for the former), from both an aggregate and bank-level perspective. Examples of ongoing work also include looking more closely at the real determinants of food price inflation, the role of managed floats and exchange rate interventions in monetary policy regimes (Benes, 2013), potential pitfalls from the use of VARs to uncover the effects of monetary policy in low-income countries, and in-depth case studies of recent monetary policy decisions in East Africa.

Part of this work is being pursued in collaboration with academic economists (Christopher Adam from Oxford University, Edward Buffie from Indiana University, Peter Montiel and Peter Pedroni from Williams College, Stephen O'Connell from Swarthmore College), as well as economists with ample experience in central bank research and operations (David Vavra and Jan Vlcek, both from OGResearch, a Prague-based think-tank).

Collaboration with Central Banks in Sub-Saharan Africa

Current research on this topic is falling on fertile ground; policymakers and IMF country teams have both shown intense interest. At the IMF/World Bank Spring Meetings held in Washington, DC in April 2012, the African Department convened a meeting of central bank governors to discuss "flexible money targeting." Andrew Berg discussed some of the results obtained from the Kenya application and emphasized the importance of the IMF's partnership with DFID in greatly enhancing the Fund's capacity to conduct and especially apply this research through collaboration with the African Department and with central banks in the region.

A joint effort has already begun with the Central Bank of Kenya, which currently serves as a pilot project. The project contemplates the implementation of FPAS at the central bank, centered on a macroeconomic model that captures the authorities' view of the monetary transmission mechanism and of the shocks hitting the economy, in line with best practices in emerging economies. To provide in-house training at the Central Bank, a team consisting of IMF staff and external experts has organized two workshops in Nairobi, and two additional workshops are scheduled to take place in the first half of 2013.

Staff from the Research Department also organized a seminar in November in Washington, D.C to train both central bank and IMF staff on model-based forecasting and policy analysis. This was a week-long collaborative effort with the Institute for Capacity Development and the African Department, and participants included central bank staff from Mozambique, Tanzania, Rwanda, Uganda and Zambia. A follow-up included an in-depth two-week-long workshop with the forecasting teams of the Central Bank of Uganda and the National Bank of Rwanda. Further intensive training with these two teams is expected in the first half of 2013.

Looking Forward

In addition to the ongoing work on Kenya, Uganda and Rwanda, IMF staff are working on in-depth analyses of monetary policy in Ghana and Tanzania. The IMF is also encouraging researchers who are new to development macroeconomics to work on issues of monetary policy in LICs.


Ongoing Projects: A non-exhaustive list:

  • "Assessing Monetary Policy VARs in Low-Income Countries: A DSGE Approach" by Christopher Adam, Bin Li, Peter Montiel and Stephen O'Connell
  • "Fiscal and Monetary Policy Responses to Food Price Shocks," by Christopher Adam, Peter Montiel, Stephen OConnell, Rafael Portillo and Luis-Felipe Zanna
  • "Monetary Policy and the Bank Lending Channel in Low-Income Countries: Micro-level Evidence," by Andrew Berg, Camelia Minoiu and staff from the Bank of Uganda
  • "The Monetary Policy Transmission Mechanism in Low-Income Countries is Alive and Kicking: Lessons from Case Studies," by Andrew Berg, Luisa Charry, Rafael Portillo and Jan Vlcek
  • "Inflation Targeting and Exchange Rate Management in Less Developed Countries," by Marco Airaudo, Ed Buffie and Luis-Felipe Zanna.


Working Papers

Published Papers

  • "Book Chapter "Identifying the Monetary Transmission Mechanism in Sub Saharan Africa", Bin Grace Li, Steve A. O'Connell, Christopher Adam, Andy Berg, and Peter Montiel), forthcoming, in the book “Monetary Policy in Sub-Saharan Africa”.
  • "Monetary Policy Issues in Sub-Saharan Africa," by A. Berg, S. O’Connell, C. Pattillo, R. Portillo, and F. Unsal, forthcoming in the Oxford Handbook of Africa and Economics: Context and Concepts.
  • "The Future of African Monetary Geography," by A. Berg, C. Pattillo, and X. Debrun, forthcoming in the Oxford Handbook of Africa and Economics: Context and Concepts.
  • "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," by J. Benes, A. Berg, R. Portillo, and D. Vavra, forthcoming in Open Economies Review.

Article IV Consultations



  • This Q&A article provides brief answers to seven questions on estimating the monetary transmission mechanism in low-income countries.

IMF Team Status
Kenya Completed
Rwanda Ongoing
Ghana Ongoing
Tanzania Ongoing
Central Banks Status
Kenya Ongoing
Uganda Ongoing
Rwanda Ongoing