Does monetary policy matter in a less developed economy? Evidence from Bangladesh

This paper explores the role of monetary policy in the context of a less developed economy. Monetary transmission mechanisms in less developed economies can be quite different from an industrialized economy, as unlike industrialized countries, these economies are characterized by the small size of organized financial markets, limited substitutability between money and other assets and weak fiscal and monetary institutions. We utilize the Structural VAR approach to analyze the monetary transmission process and impacts of monetary policy on different macro variables in Bangladesh. Monetary policy shocks are identified using non-recursive contemporaneous restrictions, which are based on the Central Bank's reaction function and the structure of the economy. We found strong evidence for the interest rate channel of monetary policy in Bangladesh. Our findings indicate that monetary policy shocks are important sources of fluctuations in the rate of interest, output and prices. Expansionary monetary policies are found to be harmful for achieving price stability in Bangladesh, as they not only increase the prices permanently, but also make the price level more volatile. We also found the evidence of a long lasting effect of monetary policy on output, which suggests that contractionary policy measures may create sustained recession in Bangladesh.

Investigating housing supply and monetary policy under global economic turbulence

This research has contributed to literature by identifying the impacts of monetary policy and global economic turbulence on the supply side of the housing sector under a vector error correction model. The research outcomes provided policy makers with an insight to change Australia's housing shortage and declining housing affordability.

Analysing the transmission pattern within the framework of housing supply and monetary policy in Australia

Housing supply is one of important components of the housing sector. Compared with an increasingly strong housing demand, the growth rates of total housing stock in Australia have exhibited a downward trend since the end of the 1990s whilst the significant adjustments in the Australian monetary policy were being implemented. This research aims to estimate the nature of the relationship between housing supply and monetary policy by a vector error correction model. According to the empirical results, a transmission pattern comprised of the indicators associated with housing supply and monetary policy can be identified, which suggests that there is a significant interrelationship between monetary policy and the supply side of the housing sector in Australia.

An analysis of Fiji's monetary policy transmission

Purpose – The purpose of this paper is to examine the monetary policy transmission mechanism for the Fiji Islands using a structural vector autoregressive (SVAR) model for the period 1975 to 2005.

Design/methodology/approach – The SVAR model investigates how a monetary policy shock – defined as a temporary and exogenous rise in the short-term interest rate – affects real and nominal macro variables; namely real output, prices, exchange rates, and money supply.

Findings – The results suggest that a monetary policy shock statistically significantly reduces output initially, but then output is able to recover to its pre-shock level. A monetary policy shock generates inflationary pressure, leads to an appreciation of the Fijian currency and reduces the demand for money. The paper also analysed the impact of a nominal effective exchange rate (NEER) shock (an appreciation) on real output and found that it leads to a statistically significant negative effect on real output.

Practical implications – The findings of this study should be of direct relevance to the research and policy work undertaken at the Reserve Bank of Fiji.

Originality/value – For a small economy, such as Fiji, where monetary policy is key to sustainable macroeconomic management, this is the first paper that undertakes a dynamic analysis of monetary policy transmission. The paper uses time series data over three decades and builds a structural VAR model, rooted in theory. This paper will be of direct relevance to the Reserve Bank of Fiji. The approach and model proposed will also be useful for applied monetary policy researchers in other developing countries where inflation rate targeting is a key element of the monetary policy setting.

Investigating the housing market fluctuation under an expansionary monetary policy in Australia

This research empirically investigates the impact of monetary policy on the housing market in Australia from 1996 to 2009. Three primary variables associated with the housing sector and monetary policy, including interest rates, money supply and house prices, are estimated by a structural vector autoregression (VAR) model. Depending upon the analysis using the impulse response function, it can be identified that monetary policy significantly affects the housing market in Australia by the adjustments in interest rates and money supply. The empirical results from this study may be useful for policy makers to enact appropriate policies in relation to the infrastructure planning.

Terms of trade shocks and monetary policy in India

Central banks in emerging market economies often grapple with understanding the monetary policy response to an inter-sectoral terms of trade shock. To address this, we develop a three sector closed economy NK-DSGE model calibrated to India. Our framework can be generalized to other emerging markets and developing economies. The model is characterized by a manufacturing sector and an agricultural sector. The agricultural sector is disaggregated into a grain and vegetable sector. The government procures grain from the grain market and stores it. We show that the procurement of grain leads to higher inflation, a change in the sectoral terms of trade, and a positive output gap because of a change in the sectoral allocation of labor. We compare the transmission of a single period positive procurement shock with a single period negative productivity shock and discuss the implications of such shocks for monetary policy setting. Our paper contributes to a growing literature on monetary policy in India and other emerging market economies.

The monetary approach to understanding the balance of payments for the Fiji Islands

The monetary approach to the balance of payments postulates a unidirectional, negative causality running from domestic credit to net foreign assets. Using data for Fiji for the period 1974–2003, we find a statistically significant, negative correlation between domestic credit and net foreign assets; but the Granger causality test reveals no statistical evidence of causality running from domestic credit to net foreign assets. This finding suggests that domestic credit is mainly passive and is not the central tool of monetary policy to which the balance of payments adjusts.