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Measuring monetary policy by money supply and interest rate: evidence from emerging economies

Bui Trung Thanh () and Gábor Kiss Dávid ()
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Gábor Kiss Dávid: Faculty of Economics and Business Administration, University of Szeged. Postal address:6722, 1 Kálvária sgt, Szeged, Hungary.

Review of Economic Perspectives, 2021, vol. 21, issue 3, 347-367

Abstract: Although measuring monetary policy is a contentious issue in the literature, much less evidence on this issue is available for emerging economies. This paper aims to investigate the role of interest rate and money supply in measuring monetary policy in twelve emerging economies that target inflation through the analysis of Granger causality, impulse response function, and forecast error variance decomposition. The empirical results show that both money supply and interest rate are useful predictors for changes in inflation. Moreover, both show a comparable power to explain the variation of inflation. However, a rise in interest rate increases rather than decreases inflation, whereas money supply has a positive and expected effect on inflation. These findings suggest that interest rate may not fully capture the overall stance of monetary policy or interest rate has a limited effect on inflation.

Keywords: monetary policy instruments; interest rate; money supply; emerging economies (search for similar items in EconPapers)
JEL-codes: E51 E52 E53 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.2478/revecp-2021-0015

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