Monetary Policy Transmission in the Eastern Caribbean Currency Union

IMF Working Papers, March 29, 2018

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Monetary Policy Transmission in the Eastern Caribbean Currency Union

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Bibliographic details

• Authors: Alla Myrvoda, Julien Reynaud
• Published: March 29, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484348291.001

Summary and main findings

• The paper empirically investigates international and domestic monetary policy transmission mechanisms in the Eastern Caribbean Currency Union (ECCU).
• It assesses interest rate pass-through of both the U.S. policy rate and the ECCU minimum saving deposit rate (MSR) into domestic interest rates through the interest rate channel.
• While economic theory suggests that the international pass-through should be high in small open economies with fixed exchange rates and open capital accounts, the authors' regression analysis points to a low long-run pass-through coefficient of the U.S. interest rate.
• The domestic transmission channel is found to operate through changes in the MSR.
• The results hold for different interest rates (deposit and lending) and are supported by survey-based findings.

Methodology and evidence

• Empirical approach: regression analysis (details and specification provided in the working paper).
• Interest rate instruments evaluated: U.S. policy rate and ECCU minimum saving deposit rate (MSR).
• Outcome variables: domestic interest rates (deposit and lending rates).
• Supporting evidence: survey-based findings corroborate regression results.

Policy-relevant implications

• International monetary policy shocks (U.S. policy rate) exhibit low long-run pass-through into ECCU domestic interest rates despite theoretical expectations for high pass-through in small open, fixed-exchange-rate economies with open capital accounts.
• Domestic policy adjustments via the MSR are an effective channel for transmitting monetary policy to domestic deposit and lending rates.

Content in this bundle

• Monetary Policy Transmission in Eastern Caribbean Currency Union, WP/18/70, March 2018
  • Monetary Policy Transmission in Eastern Caribbean Currency Union, WP/18/70, March 2018 (Markdown version)
  • Monetary Policy Transmission in Eastern Caribbean Currency Union, WP/18/70, March 2018 (PDF)