Do Monetary Policy Frameworks Matter in Low Income Countries?
This study uses a panel dataset of 79 LICs over 1990-2015 as well as event study analysis for a group of 28 sub-Saharan African LICs.
Abstract
In recent years, many Low-Income Countries (LICs) have implemented substantial reforms to their monetary policy frameworks, but existing economic research has not provided a clear rationale to guide those efforts. In this paper we analyse the role of monetary policy frameworks in the propagation of aggregate shocks, using a large panel dataset of 79 LICs over the period 1990-2015 as well as event study analysis for a group of 28 sub-Saharan African LICs. We find highly significant differences in the propagation of external shocks between the LICs that target monetary aggregates or inflation compared to those that maintain rigid nominal exchange rates as a nominal anchor. We also find that the large surprise devaluation of the Central African Franc (CFA) in January 1994 had highly significant effects on the GDP growth of 10 CFA countries compared to 18 similar countries that were outside the CFA zone. Our empirical analysis provides strong support for the role of monetary policy frameworks in facilitating macroeconomic stability in LICs—a conclusion that is particularly relevant as LICs now face a multitude of similar shocks associated with the global COVID-19 pandemic.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Alina Carare, Carlos de Resende, Andrew T. Levin, and Chelsea Zhang (2020) Do Monetary Policy Frameworks Matter in Low Income Countries? IMF Working Paper No. 2020/139
Links
Do Monetary Policy Frameworks Matter in Low Income Countries?