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Author/Editor:
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Peiris, Shanaka J. ; Ding, Ding
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Publication Date:
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July 01, 2012
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Electronic Access:
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Free Full text
(PDF file size is 328KB).
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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
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Summary:
Pacific Islands countries are vulnerable to commodity price shocks, and this poses
challenges to monetary policy. The high degree of exchange rate pass-through to headline
inflation and the weak monetary transmission mechanism in PICs suggest a greater
efficacy of exchange rate changes in affecting inflation rather than monetary policy. To
assess the tradeoff between the use of the exchange rate and monetary policy in
macroeconomic stabilization, we employ a model-based approach to examine the optimal
policy in response to the historical distribution of exogenous shocks in a Pacific Island
(Tonga). The empirical evidence and model simulations tilt in the favor of exchange rate
policy given the close relationship between exchange rate changes and headline inflation
and the low interest rate sensitivity of aggregate demand.
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Order a print copy
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Series:
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Working Paper No. 12/176
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Subject(s):
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Commodity prices | Economic models | Exchange rates | External shocks | Monetary policy | Monetary transmission mechanism | Pacific Island Countries
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Author's Keyword(s):
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Commodity Prices | Exchange Rate Pass-Through | and Monetary Policy |
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