The Effectiveness of Monetary Policy Transmission Under Capital Inflows: Evidence from Asia
20 Pages Posted: 30 Nov 2012
Date Written: November 2012
The effectiveness of the monetary policy transmission mechanism in open economies could be impaired if interest rates are driven primarily by global factors, especially during periods of large capital inflows. The main objective of this paper is to assess whether this is true for emerging Asia's economies. Using a dynamic factor model and a structural vector auto-regression model, we show that long-term interest rates in Asia are indeed predominantly driven by global factors. However, monetary policy transmission mechanism remains effective in the region, as it operates predominantly through short-term interest rates. Nevertheless, the monetary transmission mechanism, though effective, is somewhat weaker in Asia during the periods of surges in capital inflows.
Keywords: Monetary policy, Asia, Emerging markets, Capital inflows, Monetary transmission mechanism, Interest rates, Economic models, Monetary policy transmission, capital flows, dynamic factor model, structural VAR, capital inflows, monetary policy, long-term interest rates, capital flows, bond yields, monetary transmission, monetary transmission mechanism, monetary fund, risk aversion, inflation, capital markets, government bond yields, monetary policy transmission mechanism, government bonds, capital inflow, international capital flows, private capital, foreign capital, private capital flows, private capital inflows, aggregate demand, domestic monetary policy, capital inflow episodes, international
JEL Classification: E43, E52, F41
Suggested Citation: Suggested Citation