Do Monetary Policy Frameworks Matter in Low Income Countries?

35 Pages Posted: 8 Mar 2021 Last revised: 5 Nov 2022

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: March 2021

Abstract

Microeconomic evidence indicates a very high frequency of price adjustment in low income countries (LICs), raising the question of whether LICs may be reasonably characterized as exhibiting monetary neutrality. To address this question, we analyze a cross-country panel dataset of 79 LICs over the period 1990 to 2015 to assess the impact of external shocks on real GDP growth, and we find highly significant differences between LICs where the central bank targets monetary aggregates or inflation compared to LICs that maintain rigid nominal exchange rates. We also conduct an event study of the surprise devaluation of the Central African Franc (CFA) in January 1994 and find that it had highly significant effects on the output growth of 10 CFA countries relative to 18 similar countries outside the CFA zone. Consequently, the hypothesis of monetary neutrality is decisively rejected, and these findings provide strong support for the role of monetary policy frameworks in fostering price stability and macroeconomic stability in LICs.

Suggested Citation

Carare, Alina and de Resende, Carlos and Levin, Andrew T. and Zhang, Chelsea, Do Monetary Policy Frameworks Matter in Low Income Countries? (March 2021). NBER Working Paper No. w28536, Available at SSRN: https://ssrn.com/abstract=3799827

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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