Do Monetary Policy Frameworks Matter in Low Income Countries?

34 Pages Posted: 30 Oct 2020

See all articles by Alina Carare

Alina Carare

International Monetary Fund (IMF)

Carlos de Resende

International Monetary Fund (IMF)

Andrew T. Levin

Dartmouth College - Department of Economics

Chelsea Zhang

Morgan Stanley

Multiple version iconThere are 2 versions of this paper

Date Written: July 2020

Abstract

In recent years, many Low-Income Countries (LICs) have implemented substantial reforms to their monetary policy frameworks, but existing economic research has not provided a clear rationale to guide those efforts. In this paper we analyze the role of monetary policy frameworks in the propagation of aggregate shocks, using a large panel dataset of 79 LICs over the period 1990-2015 as well as event study analysis for a group of 28 sub-Saharan African LICs. We find highly significant differences in the propagation of external shocks between the LICs that target monetary aggregates or inflation compared to those that maintain rigid nominal exchange rates as a nominal anchor. We also find that the large surprise devaluation of the Central African Franc (CFA) in January 1994 had highly significant effects on the GDP growth of 10 CFA countries compared to 18 similar countries that were outside the CFA zone. Our empirical analysis provides strong support for the role of monetary policy frameworks in facilitating macroeconomic stability in LICs-a conclusion that is particularly relevant as LICs now face a multitude of similar shocks associated with the global COVID-19 pandemic.

Suggested Citation

Carare, Alina and de Resende, Carlos and Levin, Andrew T. and Zhang, Chelsea, Do Monetary Policy Frameworks Matter in Low Income Countries? (July 2020). IMF Working Paper No. 20/139, Available at SSRN: https://ssrn.com/abstract=3721181

Alina Carare (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Carlos De Resende

International Monetary Fund (IMF) ( email )

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

Andrew T. Levin

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States

Chelsea Zhang

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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