A1724
Title: Monetary policy effectiveness the case of an economic and monetary Union with a fixed exchange rate
Authors: Patrick NCho - Center for Development Economics (Cote d'Ivoire) [presenting]
Abstract: Low-income countries are generally associated with poor financial market development which leads to inefficiency of the monetary policy implemented by central banks. To investigate the extent to which this can affect the real economic activity of low-income countries through the lending rate of commercial banks, we use a heterogeneous panel structural VAR approach to estimate the dynamic responses of GDP, net exports and inflation to a monetary policy shock. We also investigate the impulse responses of lending rates to different structural shocks. Using the same technique, we find in particular that interest rates in low-income countries are rigid in the downward direction, even conditional on a perfect transmission of monetary policy. We also employ the technique to access the role of the exchange rate regime in explaining the difference between low-income countries with fixed exchange rates (for example in West African Economic and Monetary Union) compared to those with flexible exchange rates. Furthermore, we conclude that for the WAEMU countries, loosening monetary policy by increasing the Central bank refinancing will mainly lead to an increase in public borrowing to the detriment of the private sector.
