The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia

Sonali Jain-Chandra and Filiz Unsal

No 2012/265, IMF Working Papers from International Monetary Fund

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 auto-regression 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: WP; interest rate; yield; interest rate channel; Monetary policy transmission; capital flows; dynamic factor model; structural VAR; long-term interest rates; policy rate; risk aversion; interest rate transmission mechanism; Long term interest rates; Yield curve; Central bank policy rate; Short term interest rates; Capital inflows; Global; Asia and Pacific (search for similar items in EconPapers)
Pages: 19
Date: 2012-11-02
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Citations: View citations in EconPapers (9)

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Journal Article: The effectiveness of monetary policy transmission under capital inflows: Evidence from Asia (2014)
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