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Monetary policy transmission and macroeconomic policy coordination in Pacific island countries
Author(s) -
Yang Yongzheng,
Davies Matt,
Wang Shengzu,
Dunn Jonathan,
Wu Yiqun
Publication year - 2012
Publication title -
asian‐pacific economic literature
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.232
H-Index - 21
eISSN - 1467-8411
pISSN - 0818-9935
DOI - 10.1111/j.1467-8411.2012.01333.x
Subject(s) - monetary policy , exchange rate flexibility , interest rate , economics , exchange rate , monetary economics , fiscal policy , credit channel , financial market , financial crisis , financial system , international economics , inflation targeting , macroeconomics , exchange rate regime , finance
During the global financial crisis, central banks in Pacific island countries eased monetary policy to stimulate economic activity. Judging by the ensuing movements in commercial bank interest rates and private sector credit, monetary policy transmission appears to be weak. This is confirmed by an empirical examination of interest rate pass‐through and credit growth. Weak credit demand and under‐developed financial markets seem to have limited the effectiveness of monetary policy, but the inflexibility of exchange rates and rising real interest rates have also served to frustrate the central banks' efforts despite a supporting fiscal policy. While highlighting the importance of developing domestic financial markets in the long run, this experience also points to the need to coordinate macroeconomic policies and to use all macroeconomic tools available in conducting countercyclical policies, including exchange rate flexibility.