The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Applying commonly used vector autoregression (VAR) techniques, this paper investigates the transmission mechanism of monetary policy on output and prices for Mauritius, using data for 1999-2009. The results show that (i) an unexpected monetary policy tightening-an increase in the Bank of Mauritius policy interest rate-leads to a decline in prices and output but the effect on output is weaker; (ii) an unexpected decrease in the money supply or an unexpected increase in the nominal effective exchange rate result in a decrease in prices; and (iii) variations of the policy variables account for small a percentage of the fluctuations in output and prices. Taken together, these results suggest a rather weak monetary policy transmission mechanism. Finally, we find some differences in the transmission mechanism depending on whether core or headline consumer price index is used in the estimations.