Do Monetary Policy Frameworks Matter in Low Income Countries? / Alina Carare, Carlos de Resende, Andrew T. Levin, Chelsea Zhang.

Format:

Book

Author/Creator:

Carare, Alina.

Contributor:

de Resende, Carlos.

Levin, Andrew T.

Z, Chelsea.

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w28536.

NBER working paper series no. w28536

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2021.

Summary:

Microeconomic evidence indicates a very high frequency of price adjustment in low income countries (LICs), raising the question of whether LICs may be reasonably characterized as exhibiting monetary neutrality. To address this question, we analyze a cross-country panel dataset of 79 LICs over the period 1990 to 2015 to assess the impact of external shocks on real GDP growth, and we find highly significant differences between LICs where the central bank targets monetary aggregates or inflation compared to LICs that maintain rigid nominal exchange rates. We also conduct an event study of the surprise devaluation of the Central African Franc (CFA) in January 1994 and find that it had highly significant effects on the output growth of 10 CFA countries relative to 18 similar countries outside the CFA zone. Consequently, the hypothesis of monetary neutrality is decisively rejected, and these findings provide strong support for the role of monetary policy frameworks in fostering price stability and macroeconomic stability in LICs.

Notes:

Print version record

March 2021.