Do Monetary Policy Frameworks Matter in Low Income Countries?

By Alina Carare, Carlos de Resende, Andrew Levin, Chelsea Zhang

July 24, 2020

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Alina Carare, Carlos de Resende, Andrew Levin, and Chelsea Zhang. Do Monetary Policy Frameworks Matter in Low Income Countries?, (USA: International Monetary Fund, 2020) accessed September 20, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

In recent years, many Low-Income Countries (LICs) have implemented substantial reforms to their monetary policy frameworks, but existing economic research has not provided a clear rationale to guide those efforts. In this paper we analyze the role of monetary policy frameworks in the propagation of aggregate shocks, using a large panel dataset of 79 LICs over the period 1990-2015 as well as event study analysis for a group of 28 sub-Saharan African LICs. We find highly significant differences in the propagation of external shocks between the LICs that target monetary aggregates or inflation compared to those that maintain rigid nominal exchange rates as a nominal anchor. We also find that the large surprise devaluation of the Central African Franc (CFA) in January 1994 had highly significant effects on the GDP growth of 10 CFA countries compared to 18 similar countries that were outside the CFA zone. Our empirical analysis provides strong support for the role of monetary policy frameworks in facilitating macroeconomic stability in LICs—a conclusion that is particularly relevant as LICs now face a multitude of similar shocks associated with the global COVID-19 pandemic.

Subject: Exchange rates, Foreign exchange, Inflation targeting, Monetary policy, Monetary policy frameworks, Oil prices, Prices, Production, Production growth

Keywords: CFA franc, Change frequency, Dummy coefficient, Exchange rates, Framework dummy, Framework indicator, Framework matter, Framework variable, Global, Growth, Inflation targeting, Low-income countries, Monetary policy framework in LICs, Monetary policy framework variable, Monetary policy frameworks, Oil price shock, Oil prices, Price stability, Production growth, Sensitivity analysis, Staggered price setting, Terms of trade, Transmission of shocks, Transparent monetary policy framework, Unanticipated monetary policy shock, World GDP, WP

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/139
Stock No:

WPIEA2020139
ISBN:

9781513550671
ISSN:

1018-5941

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