Monetary Policy Transmission in Mauritius Using a VAR Analysis
IMF Working Papers, February 1, 2010
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- Monetary Policy Transmission in Mauritius Using a VAR Analysis
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Bibliographic details
- Authors: Charalambos G Tsangarides
- Published: February 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451962789.001
Summary
- Applies commonly used vector autoregression (VAR) techniques to investigate the transmission mechanism of monetary policy on output and prices for Mauritius, using data for 1999-2009.
- Finds evidence pointing to a rather weak monetary policy transmission mechanism.
- Notes differences in the transmission mechanism depending on whether core or headline consumer price index is used in the estimations.
Key findings
- An unexpected monetary policy tightening — an increase in the Bank of Mauritius policy interest rate — leads to a decline in prices and output, but the effect on output is weaker.
- An unexpected decrease in the money supply results in a decrease in prices.
- An unexpected increase in the nominal effective exchange rate results in a decrease in prices.
- Variations of the policy variables account for small a percentage of the fluctuations in output and prices.
Methodology
- Empirical approach: vector autoregression (VAR) techniques.
- Sample period: 1999-2009.
- Price measures: estimations performed using both core consumer price index and headline consumer price index, with noted differences in transmission across these measures.
Policy implications and interpretation
- The combination of results (weak output response, price declines from several shocks, and small explanatory power of policy variables for fluctuations) suggests a rather weak monetary policy transmission mechanism in Mauritius over the sample period.
- The sensitivity of results to the choice between core and headline CPI indicates that policy assessment and rule evaluation should account for the price measure used.