Do Monetary Policy Frameworks Matter in Low Income Countries?

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

No 28536, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Microeconomic evidence indicates a very high frequency of price adjustment in low income countries (LICs), raising the question of whether LICs may be reasonably characterized as exhibiting monetary neutrality. To address this question, we analyze a cross-country panel dataset of 79 LICs over the period 1990 to 2015 to assess the impact of external shocks on real GDP growth, and we find highly significant differences between LICs where the central bank targets monetary aggregates or inflation compared to LICs that maintain rigid nominal exchange rates. We also conduct an event study of the surprise devaluation of the Central African Franc (CFA) in January 1994 and find that it had highly significant effects on the output growth of 10 CFA countries relative to 18 similar countries outside the CFA zone. Consequently, the hypothesis of monetary neutrality is decisively rejected, and these findings provide strong support for the role of monetary policy frameworks in fostering price stability and macroeconomic stability in LICs.

JEL-codes: E02 E52 E58 O11 O23 (search for similar items in EconPapers)
Date: 2021-03
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Published as Alina Carare & Carlos Resende & Andrew T. Levin & Chelsea Zhang, 2023. "Do Monetary Policy Frameworks Matter in Low-Income Countries?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(4), pages 1000-1024, December.

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Journal Article: Do Monetary Policy Frameworks Matter in Low-Income Countries? (2023)
Working Paper: Do Monetary Policy Frameworks Matter in Low Income Countries? (2020)
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