The effectiveness of monetary policy transmission under capital inflows: Evidence from Asia

Sonali Jain-Chandra and Filiz Unsal

Borsa Istanbul Review, 2014, vol. 14, issue 2, 96-103

Abstract: The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia’s economies. Using a dynamic factor model and a structural vector autoregression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.

Keywords: Monetary policy transmission; Capital flows; Dynamic factor model; Structural VAR (search for similar items in EconPapers)
JEL-codes: E43 E52 F41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bor:bistre:v:14:y:2014:i:2:p:96-103

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