The Transmission Mechanism in Armenia: New Evidence from a Regime Switching VAR Analysis

32 Pages Posted: 1 Feb 2011

See all articles by Anna R. Bordon

Anna R. Bordon

International Monetary Fund (IMF)

Anke Weber

International Monetary Fund (IMF)

Date Written: November 2010

Abstract

The introduction of inflation targeting in 2006, together with important economic developments such as dedollarization, marked the beginning of a new macroeconomic framework in Armenia, which is likely to have changed the effectiveness of monetary policy. This paper is the first attempt to analyze whether the transmission mechanism in Armenia has been subject to a structural break by employing a Markov-Switching VAR framework. Results support the existence of such a structural break around the time inflation targeting was introduced and reduced levels of dollarization were observed. Results from introducing a threshold variable into this framework furthermore show that reduced levels of dollarization are an important determinant of the effectiveness of monetary policy.

Keywords: Armenia, Dollarization, Economic models, Exchange rate policy, Inflation targeting, Monetary policy, Monetary transmission mechanism

Suggested Citation

Bordon, Anna R. and Weber, Anke, The Transmission Mechanism in Armenia: New Evidence from a Regime Switching VAR Analysis (November 2010). IMF Working Paper No. 10/270, Available at SSRN: https://ssrn.com/abstract=1751382

Anna R. Bordon

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Anke Weber

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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