Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies

28 Pages Posted: 18 Oct 2011

See all articles by Sanchita Mukherjee

Sanchita Mukherjee

San Jose State University

Rina Bhattacharya

International Monetary Fund (IMF)

Date Written: October 2011

Abstract

In this paper we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five potential inflation targeting economies in the MENA region and compare it with fourteen inflation targeting (IT) emerging market economies (EMEs) using panel data analysis. Contrary to some existing studies, our empirical results suggest that private consumption and investment in both groups of countries are sensitive to movements in real interest rates. Moreover, we find that the adoption of IT did not significantly alter the operation of the interest rate channel in IT EMEs. Also, the interest rate elasticities of private consumption and private investment vary with the level of development of the domestic financial market. Finally, capital account liberalization have opposite effects on private consumption and private investment in the two groups of countries.

Keywords: Banks, Cross country analysis, Demand, Emerging markets, Inflation targeting, Interest rates, Middle East, Monetary policy, North Africa, Private consumption, Private investment, Private sector

Suggested Citation

Mukherjee, Sanchita and Bhattacharya, Rina, Inflation Targeting and Monetary Policy Transmission Mechanisms in Emerging Market Economies (October 2011). IMF Working Paper No. 11/229, Available at SSRN: https://ssrn.com/abstract=1945616

Sanchita Mukherjee (Contact Author)

San Jose State University ( email )

San Jose, CA 95192-0066
United States

Rina Bhattacharya

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

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