The Transmission Mechanism for Monetary Policy in Developing Countries

30 Pages Posted: 15 Feb 2006

See all articles by Peter J. Montiel

Peter J. Montiel

Williams College - Department of Economics

Date Written: May 1990

Abstract

In many developing countries the financial system is characterized by the absence of organized markets for securities and equities, by capital controls, and by legal ceilings on bank borrowing and lending rates, a situation which gives rise to parallel markets for foreign exchange and informal loan markets. This paper analyzes how changes in monetary policy instruments (bank credit, administered interest rates, required reserve ratios, and intervention in the parallel exchange market) are transmitted to domestic aggregate demand in a financially-repressed economy. Such an analysis is necessary to understand how the move to a more market-oriented system would affect the economy in the short run.

JEL Classification: 121, 311

Suggested Citation

Montiel, Peter J., The Transmission Mechanism for Monetary Policy in Developing Countries (May 1990). IMF Working Paper No. 90/47, Available at SSRN: https://ssrn.com/abstract=884801

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