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

Author/Editor: Baldini, Alfredo | Benes, Jaromir | Berg, Andrew | Dao, Mai | Portillo, Rafael
Authorized for Distribution: April 1, 2012
Electronic Access: Free Full Text (PDF file size is 1,604KB)
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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.

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.
 
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Series: Working Paper No. 12/94
Subject(s): Banking sector | Economic models | Financial crisis | Global Financial Crisis 2008-2009 | Low-income developing countries | Monetary policy | Risk premium | Zambia
Author's keyword(s): Global Financial Crisis | Low-Income Countries | Monetary Policy | Zambia
 
English  
    Published:   April 1, 2012        
            Format:   Paper
    Stock No:   WPIEA2012094   Pages:   46
    Price:   US$18.00 (Academic Rate: US$18.00 )
       
     
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