Monetary Policy Transmission Mechanisms in Pacific Island Countries

25 Pages Posted: 2 May 2011

See all articles by Yongzheng Yang

Yongzheng Yang

International Monetary Fund (IMF) - African Department

Matt Davies

affiliation not provided to SSRN

Shengzu Wang

International Monetary Fund (IMF) - Asia and Pacific Department

Jonathan Dunn

International Monetary Fund (IMF) - Middle East and Central Asia Department

Yiqun Wu

International Monetary Fund (IMF)

Date Written: April 2011

Abstract

During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass-through and credit growth. Weak credit demand and underdeveloped financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks’ efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.

Keywords: Central banks, Cross country analysis, Demand, Exchange rate regimes, Exchange rates, Fiscal policy, Interest rates, Monetary policy, Pacific Island Countries

Suggested Citation

Yang, Yongzheng and Davies, Matt and Wang, Shengzu and Dunn, Jonathan and Wu, Yiqun, Monetary Policy Transmission Mechanisms in Pacific Island Countries (April 2011). IMF Working Papers, Vol. , pp. 1-24, 2011. Available at SSRN: https://ssrn.com/abstract=1826549

Yongzheng Yang (Contact Author)

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

1700 19th Street, NW
Washington, DC 20431
United States
202-623-4339 (Phone)
202-623-4237 (Fax)

Matt Davies

affiliation not provided to SSRN ( email )

Shengzu Wang

International Monetary Fund (IMF) - Asia and Pacific Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Jonathan Dunn

International Monetary Fund (IMF) - Middle East and Central Asia Department ( email )

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

Yiqun Wu

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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