Monetary transmission in low income countries

Peter Montiel, Antonio Spilimbergo and Prachi Mishra

No 7951, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper reviews the monetary transmission mechanism in low income countries (LICs). We use monetary transmission in advanced and emerging markets as a benchmark to identify aspects of the transmission mechanism that may operate differently in LICs. In particular, we focus on the effects of financial market structure on monetary transmission. The weak institutional framework prevalent in LICs drastically reduces the role of securities markets and increases the cost of bank lending to private firms. Coupled with imperfect competition in the banking sector, this means that banks with chronically high excess reserves invest in domestic public bonds or (when possible) in foreign bonds. With the financial system not intermediating funds properly, the traditional monetary transmission channels (interest rate, bank lending, and asset price) are impaired. The exchange rate channel, on the other hand, tends to be undermined by central bank intervention in the foreign exchange market. These conclusions are supported by review of the institutional frameworks, statistical analysis, and previous literature.

Keywords: Monetary policy; exchange rate; Interest rate; Banks; Credit; Institutions (search for similar items in EconPapers)
JEL-codes: E5 O11 O16 (search for similar items in EconPapers)
Date: 2010-08
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Citations: View citations in EconPapers (60)

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Related works:
Working Paper: Monetary Transmission in Low Income Countries (2010)
Working Paper: Monetary transmission in low income countries (2010)
Working Paper: Monetary transmission in low income countries (2010)
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