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VAR meets DSGE: Uncovering the Monetary Transmission Mechanism in Low-Income Countries
Author:
Ms. Grace B Li
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,
Mr. Stephen A. O'Connell null

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Mr. Christopher S Adam
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Mr. Andrew Berg
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Mr. Peter J Montiel
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Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 090
Language:
English
Publication Date:
11 Apr 2016
DOI:
https://doi.org/10.5089/9781484324752.001
ISBN:
9781484324752
ISSN:
1018-5941
Pages:
45
Keywords:
WP; monetary policy; interest rate; transmission mechanism; Monetary Transmission Mechanism; Low Income Countries; Vector Autoregression Methods; Monte Carlo Methods; monetary policy shock; LIC environment; GDP gap; inflation rate; interest rate target; estimation environment; monetary policy effect; research environment; LIC context; features of the estimation environment; exchange-rate elasticity; monetary policy rule; Vector autoregression; Dynamic stochastic general equilibrium models; Structural vector autoregression; Supply shocks; Africa
Legal-disclaimer:
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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VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries (LICs). But are structural VARs identified via short-run restrictions capable of detecting a transmission mechanism when one exists, under research conditions typical of these countries? Using small DSGEs as data-generating processes, we assess the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid—a strong caveat, especially in LICs. However, many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that “insignificant” results can be expected even when the underlying transmission mechanism is strong.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund