Essays on Monetary Policy, Institutions and Terms of Trade Shocks in Emerging Market Economies
Loading...
Date
2012-11-06
Authors
Hove, Seedwell
Journal Title
Journal ISSN
Volume Title
Publisher
University of Cape Town
Abstract
Abstract
This thesis focuses on two important features of emerging market economies:
institutional weaknesses and the exposure to commodity terms of trade shocks and
how they shape the macroeconomic dynamics and the conduct of monetary policy.
These issues are discussed in three essays. The first essay empirically evaluates the
role of institutional structures in inflation targeting in emerging market economies
(EMEs). The second essay theoretically investigates the appropriate monetary
policy responses to commodity terms of trade shocks using a multi-sector New
Keynesian dynamic stochastic general equilibrium (DSGE) model. Finally, the
third essay empirically analyses the .responses of different monetary policy regimes
to commodity terms of trade shocks in emerging market economies.
The first essay investigates whether monetary, fiscal and financial institutional
structures really matter for the achievement of inflation targets in emerging market
economies. Particular emphasis is placed on the extent to which inflation deviations from target bands are affected by central bank independence, fiscal discipline
and financial sector development. The study contnoutes to the literature by taking stock of the intrinsic role played by institutional structures in the achievement
of inflation targets since the adoption of inflation targeting in EMEs. Using the
panel ordered logit model, the analysis shows that improvement in central bank
independence, fiscal discipline and financial systems reduces the probability of inflation target misses. Precisely, countries with more independent central banks
tend to achieve inflation targets more frequently. A one percent increase in central bank independence increases the probability of achieving the target band by
0.16%, while reducing the probability of inflation being above the target band
by 0.11%. Moreover, countries with weak fiscal institutions and less developed
financial systems have a higher probability of missing their inflation targets. The
improvement in institutional structures also enhances the effectiveness of monetary
policy. The thesis also provides evidence that other macroeconomic and structural
variables such as exchange rate gap, output gapt inflation target horizon and level
of openness explain inflation target misses. The results suggest that there is need
to continue to reform institutional structures in order to achieve sustainable price
stability.