Adolfo Barajas, Ralph Chami, Christian Ebeke, and Anne Oeking
Many developing and emerging market economies are modernizing the way they conduct monetary policy to make it more transparent and forward looking, with more emphasis on exchange rate flexibility, an explicit inflation objective, and greater reliance on a short-term interest rate as the policy instrument.
But to be successful these countries must have an operable “transmission mechanism” that permits changes the central bank makes in the policy rate to propagate through the economy and ultimately affect spending decisions by households and firms. Several recent studies find that this transmission mechanism is missing or severely weakened in lower-income countries.
We have found the same weakened transmission mechanism in middle-income and emerging market economies that are major recipients of remittances—that is, money citizens living abroad send home to their families. That means policymakers in those economies should be aware of the difficulties they face in pursuing a fully modern monetary policy, and they may want to consider measures to strengthen the transmission mechanism or other approaches to help them conduct monetary policy.
Barajas, Adolfo, Ralph Chami, Christian Ebeke, and Anne Oeking, 2016, “What’s Different about Monetary Policy Transmission in Remittance-Dependent Countries?” IMF Working Paper 16/44 (Washington: International Monetary Fund).
Barajas, Adolfo, Ralph Chami, Christian Ebeke, and Sampawende J. Tapsoba, 2012, “Workers’ Remittances: An Overlooked Channel of International Business Cycle Transmission?” IMF Working Paper 12/251 (Washington: International Monetary Fund).
Chami, Ralph, Adolfo Barajas, Thomas Cosimano, Connel Fullenkamp, Michael Gapen, and Peter Montiel, 2008, Macroeconomic Consequences of Remittances, IMF Occasional Paper 259 (Washington: International Monetary Fund).
Mishra, Prachi, Peter Montiel, and Antonio Spilimbergo, 2012, “Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications,” IMF Economic Review, Vol. 60, No. 2, pp. 270–302.