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The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia
Author: Ms. Sonali Jain-Chandra and Ms. Filiz D Unsal
Series:
IMF Working Papers
Volume/Issue:
Volume 2012: Issue 265
Language:
English
Publication Date:
02 Nov 2012
DOI:
https://doi.org/10.5089/9781475525823.001
ISBN:
9781475525823
ISSN:
1018-5941
Pages:
19
Keywords:
WP; interest rate; yield; interest rate channel; Monetary policy transmission; capital flows; dynamic factor model; structural VAR; long-term interest rates; policy rate; risk aversion; interest rate transmission mechanism; Long term interest rates; Yield curve; Central bank policy rate; Short term interest rates; Capital inflows; Global; Asia and Pacific
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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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The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia’s economies. Using a dynamic factor model and a structural vector auto-regression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund