The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia

November 2, 2012

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Format: Chicago

Sonali Jain-Chandra, and Filiz D Unsal. The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia, (USA: International Monetary Fund, 2012) accessed November 8, 2024

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

The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia’s economies. Using a dynamic factor model and a structural vector auto-regression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.

Subject: Balance of payments, Capital inflows, Central bank policy rate, Financial services, Long term interest rates, Short term interest rates, Yield curve

Keywords: Asia and Pacific, Capital flows, Capital inflows, Central bank policy rate, Dynamic factor model, Global, Interest rate, Interest rate channel, Interest rate transmission mechanism, Long term interest rates, Long-term interest rates, Monetary policy transmission, Policy rate, Risk aversion, Short term interest rates, Structural VAR, WP, Yield, Yield curve

Publication Details

Pages:

19
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/265
Stock No:

WPIEA2012265
ISBN:

9781475525823
ISSN:

1018-5941

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