Do Monetary Policy Frameworks Matter in Low Income Countries?

Alina Carare, Carlos de Resende, Andrew Levin () and Chelsea Zhang

No 2020/139, IMF Working Papers from International Monetary Fund

Abstract: In recent years, many Low-Income Countries (LICs) have implemented substantial reforms to their monetary policy frameworks, but existing economic research has not provided a clear rationale to guide those efforts. In this paper we analyze the role of monetary policy frameworks in the propagation of aggregate shocks, using a large panel dataset of 79 LICs over the period 1990-2015 as well as event study analysis for a group of 28 sub-Saharan African LICs. We find highly significant differences in the propagation of external shocks between the LICs that target monetary aggregates or inflation compared to those that maintain rigid nominal exchange rates as a nominal anchor. We also find that the large surprise devaluation of the Central African Franc (CFA) in January 1994 had highly significant effects on the GDP growth of 10 CFA countries compared to 18 similar countries that were outside the CFA zone. Our empirical analysis provides strong support for the role of monetary policy frameworks in facilitating macroeconomic stability in LICs—a conclusion that is particularly relevant as LICs now face a multitude of similar shocks associated with the global COVID-19 pandemic.

Keywords: WP; oil price shock; terms of trade; change frequency; monetary policy framework in LICs; sensitivity analysis; transparent monetary policy framework; unanticipated monetary policy shock; Monetary policy frameworks; transmission of shocks; growth; low-income countries; framework indicator; price stability; framework variable; framework dummy; framework matter; Exchange rates; Production growth; Inflation targeting; Oil prices; Global; staggered price setting; world GDP; CFA franc; monetary policy framework variable; dummy coefficient (search for similar items in EconPapers)
Pages: 33
Date: 2020-07-24
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
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Related works:
Journal Article: Do Monetary Policy Frameworks Matter in Low-Income Countries? (2023)
Working Paper: Do Monetary Policy Frameworks Matter in Low Income Countries? (2021)
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