Monetary Transmission in Low Income Countries

43 Pages Posted: 16 Aug 2010

See all articles by Prachi Mishra

Prachi Mishra

International Monetary Fund (IMF) - Research Department

Peter J. Montiel

Williams College - Department of Economics

Antonio Spilimbergo

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR); University of Michigan at Ann Arbor - The William Davidson Institute

Multiple version iconThere are 2 versions of this paper

Date Written: August 2010

Abstract

This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.

Keywords: banks, credit, exchange rate, institutions, interest rate, Monetary policy

JEL Classification: E5, O11, O16

Suggested Citation

Mishra, Prachi and Montiel, Peter J. and Spilimbergo, Antonio, Monetary Transmission in Low Income Countries (August 2010). CEPR Discussion Paper No. DP7951. Available at SSRN: https://ssrn.com/abstract=1658258

Prachi Mishra (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Peter J. Montiel

Williams College - Department of Economics ( email )

Fernald House
Office: Fernald 14
Williamstown, MA 01267
United States
413-597-2103 (Phone)
413-597-4045 (Fax)

HOME PAGE: http://www.williams.edu/Economics/faculty/montiel.htm

Antonio Spilimbergo

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6346 (Phone)
202-623-6336 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

University of Michigan at Ann Arbor - The William Davidson Institute ( email )

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

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