Monetary Policy Transmission in an Emerging Market Setting

ByIla Patnaik, Ajay Shah, Rudrani Bhattacharya

January 1, 2011

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

Some emerging economies have a relatively ineffective monetary policy transmission owing to weaknesses in the domestic financial system and the presence of a large and segmented informal sector. At the same time, small open economies can have a substantial monetary policy transmission through the exchange rate channel. In order to understand this setting, we explore a unified treatment of monetary policy transmission and exchangerate pass-through. The results for an emerging market, India, suggest that the most effective mechanism through which monetary policy impacts inflation runs through the exchange rate.

Subject: Central bank policy rate, Exchange rate pass-through, Exchange rates, Financial services, Foreign exchange, Price indexes, Prices, Wholesale price indexes

Keywords: Central bank policy rate, channel of monetary policy, East Asia, exchange rate, Exchange rate pass-through, Exchange rates, interest rate, interest rate channel, interest rate hike, Monetary policy transmission, open economy, Price indexes, sc, transmission mechanism, Wholesale price indexes, WP

Pages:
26
Volume:
2011
DOI:
https://doi.org/10.5089/9781455211838.001
Issue:
005
Series:
Working Paper No. 2011/005
Stock No:
WPIEA2011005
ISBN:
9781455211838
ISSN:
1018-5941

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