Do Monetary Policy Frameworks Matter in Low Income Countries?
IMF Working Papers, July 24, 2020
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Bibliographic details
- Authors: Alina Carare, Carlos de Resende, Andrew Levin, Chelsea Zhang
- Published: July 24, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513550671.001
Summary
- Research question: analyze the role of monetary policy frameworks in the propagation of aggregate shocks in Low-Income Countries (LICs).
- Data and methods:
- Large panel dataset of 79 LICs over the period 1990-2015.
- Event study analysis for a group of 28 sub-Saharan African LICs.
- Core conclusion: strong empirical support that monetary policy frameworks matter for facilitating macroeconomic stability in LICs, particularly relevant amid shocks associated with the global COVID-19 pandemic.
Empirical findings
- Framework-specific propagation of external shocks:
- Highly significant differences in the propagation of external shocks between LICs that target monetary aggregates or inflation versus LICs that maintain rigid nominal exchange rates as a nominal anchor.
- CFA franc episode:
- 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.
- Scope and scale:
- Sample covers 79 LICs, 1990-2015.
- Event study focused on 28 sub-Saharan African LICs.
Policy implications and interpretation
- Monetary policy frameworks influence how external shocks are transmitted to real activity in LICs.
- Frameworks that target monetary aggregates or inflation differ materially from rigid nominal exchange rate pegs in terms of shock propagation and macroeconomic outcomes.
- Relevance for current policy: findings underscore the importance of monetary policy framework choice as LICs confront simultaneous global shocks (e.g., those associated with the global COVID-19 pandemic).
Key statistics and bibliographic identifiers
- Sample size: 79 LICs.
- Time period analyzed: 1990-2015.
- Sub-sample: 28 sub-Saharan African LICs.
- CFA devaluation event date: January 1994.
- Affected CFA countries in comparison: 10 CFA countries versus 18 similar non-CFA countries.
- Pages: 33
- Volume: 2020
- Issue: 139
- Series: Working Paper No. 2020/139
- DOI: https://doi.org/10.5089/9781513550671.001
- ISBN: 9781513550671
- ISSN: 1018-5941
IMF Working Paper by Alina Carare, Carlos de Resende, Andrew Levin, and Chelsea Zhang, July 24, 2020.
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