Low Credit Level Does Not Harm Monetary Policy Effectiveness
A low level of credit in a country does not appear to hinder the effectiveness of monetary policy in controlling inflation, a new working paper published by the International Monetary Fund finds. Rather, exchange rate flexibility is a more important factor.
Monetary policy, at least in part, operates through both an interest rate and credit channel, write the IMF’s Ana Carolina Saizar and Nigel Chalk. “The question arises, therefore, whether monetary policy is a less potent a device in affecting output and inflation in countries that have low levels of credit and where investment and consumption are not financed by borrowing in local currency.” The paper, which is not official IMF policy, examines the empirical evidence in a broad sample of emerging market countries.
The data suggests that the effectiveness of changes in policy interest rates in influencing the path of inflation appear to be unrelated to the level of credit and that, instead, the willingness to allow exchange rate flexibility is a far more important determining factor.
“It is somewhat reassuring that, in looking at individual countries or at the combined experience of countries in a panel framework, there appears to be little empirical evidence that the level of credit or the degree of monetization represents a constraint on monetary policy,” the authors conclude. “When controlling for the exchange rate regime it is clear that allowing for exchange rates to move flexibly is a far more important factor in ensuring that monetary policy can influence domestic inflation. Finally, even in the subsample of countries with floating exchange rates, there is no evidence that the level of private sector credit has a meaningful impact on the effectiveness of monetary policy.”
For details see: Is Monetary Policy Effective When Credit is Low?
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
