Monetary policy in less developed economies

Abstract

Monetary policy's weight in macroeconomic policy has increased over the past years, especially with the liberalization of financial markets and development of new financial instruments. With this new global economy, the gap between countries has become wider, and the less developed are unsuccessfully (for the most part) trying to catch up with the short list of industrialized economies. Less developed countries consists of small open economies that are more exposed to international shocks with a very low level of financial development and other factors such as remittances or dollarization that are affecting implementation of policies. The aim of this thesis is to test for monetary policy effectiveness of less developed economies using a panel of underdeveloped and developing countries. Using the International Financial Statistics dataset published by the IMF, I test for the impact of the monetary policy instrument, the central bank's nominal interest rate, on the economic growth, inflation and also the channel through which the outcome is more significant. The results show that in all of these countries, show that monetary policy through interest rate isn't as efficient as it should be. The exchange rate channel has a more significant impact when trying to impact growth particularly in countries with very low levels of financial development.