Cover IMF Working Papers
Global Commodity Prices, Monetary Transmission, and Exchange Rate Pass-Through in the Pacific Islands
Author: Mr. Shanaka J Peiris and Ding Ding
Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 176
Language:
English
Publication Date:
01 Jul 2012
DOI:
https://doi.org/10.5089/9781475505245.001
ISBN:
9781475505245
ISSN:
1018-5941
Pages:
16
Keywords:
WP; headline inflation; Commodity Prices; Exchange Rate Pass-Through; Monetary Policy; basket regime; food price inflation; demand condition; exchange rate transmission; transmission in PIC; exchange rate fluctuation; exchange rate basket regime; inflation gap; oil price inflation; exchange rate channel; Exchange rates; Inflation; Real exchange rates; Exchange rate adjustments; Global; Pacific Islands
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Pacific Islands countries are vulnerable to commodity price shocks, and this poses challenges to monetary policy. The high degree of exchange rate pass-through to headline inflation and the weak monetary transmission mechanism in PICs suggest a greater efficacy of exchange rate changes in affecting inflation rather than monetary policy. To assess the tradeoff between the use of the exchange rate and monetary policy in macroeconomic stabilization, we employ a model-based approach to examine the optimal policy in response to the historical distribution of exogenous shocks in a Pacific Island (Tonga). The empirical evidence and model simulations tilt in the favor of exchange rate policy given the close relationship between exchange rate changes and headline inflation and the low interest rate sensitivity of aggregate demand.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund