The Effectiveness of Monetary Policy in Small Open Economies: An Empirical Investigation
IMF Working Papers, September 16, 2016
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- The Effectiveness of Monetary Policy in Small Open Economies: An Empirical Investigation
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Bibliographic details
- Authors: Keyra Primus
- Published: September 16, 2016
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475536874.001
Research question and methodology
- Examines relative effectiveness of indirect and direct monetary policy instruments in Barbados, Jamaica and Trinidad and Tobago.
- Estimates a restricted Vector Autoregressive model with Exogenous Variables (VARX).
- Assumes the central bank conducts monetary policy using a Taylor-type rule.
- Evaluates the effects of a reserve requirement policy.
Key empirical findings
- A positive shock to the policy interest rate has a direct effect on commercial banks' interest rates.
- Transmission from a policy interest rate shock to real variables is weak.
- An increase in the required reserve ratio:
- Is successful in reducing private sector credit.
- Reduces excess reserves.
- Alleviates pressures on the exchange rate.
Policy implications and recommendations
- Central banks in small open economies should consider using reserve requirements as a complement to interest rate policy to achieve macroeconomic objectives.
Subjects and keywords (as listed)
- Subjects: Banking, Central bank policy rate, Financial services, Inflation, Monetary policy, Prices, Prime rates, Reserve requirements, Short term interest rates
- Keywords include: bank liquidity, Caribbean, central bank, Central bank policy rate, changes in Barbados, contractionary monetary policy, contractionary monetary policy shock, effect monetary policy, exchange rate, Inflation, interest rate change, interest rate changes in Barbados, interest rate channel, Macroeconometric Model, monetary policy shock, monetary policy tool, policy interest rate, policy interest rate in the baseline experiment, Prime rates, required reserve ratio, reserve ratio, Reserve Requirements, Short term interest rates, Small Open Economies, WP