The Significance of Monetary Policy Transmission Mechanism in the Sustainable Development of the SAARC Economic Community

Muhammad Zahid,Muhammad Ramzan,Jimin Shim,Muhammad Zia Ul Haq,Wonseok Lee,Jinsoo Hwang

doi:10.3390/su132313171

Muhammad Zahid, Muhammad Ramzan + Show 4 more

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https://doi.org/10.3390/su132313171

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Abstract

The purpose of this study is to examine the monetary policy transmission mechanisms in seven South Asian Association for Regional Cooperation (SAARC) countries to discover the viability of the convergence of the SAARC into a monetary and economic union based on common monetary channels. By employing optimal currency area theory, we used the restricted VAR analysis on the annual data from 1978 to 2017. We find that the money channel response provides proof for the presence of an exchange rate and credit channels. Furthermore, the real sector also responds to changes in fiscal and monetary shocks through the exchange rate and credit channels over short-run to long-run time horizons. This implies that the SAARC is a good candidate due to common exchange rate and credit channels. The function of the variance decomposition and the impulse for forming a monetary and economic union is that they share a coincidental pattern of dynamic reactions of inflation and growth to exogenous shocks. If the SAARC monetary and economic union is created, it will reap overall economic benefits inside and outside of Asia just like the European Union (EU).

Highlights

The complexity of monetary policy transmission mechanisms (MPTMs) has drawn a lot of attention from economists and policymakers over the past two decades for better understanding of how monetary policy affects the real economy
Even though MPTMs vary by region, previous studies have identified six channels: credit channel (CC), asset price channel (APC), exchange rate channel (ERC), interest rate channel (IRC), bank lending channel (BLC), and balance sheet channel (BSC) [3]
This study examines the role of MPTMs in the sustainable development of the South Asian Association for Regional Cooperation (SAARC)

Summary

Introduction

The complexity of monetary policy transmission mechanisms (MPTMs) has drawn a lot of attention from economists and policymakers over the past two decades for better understanding of how monetary policy affects the real economy. Due to persistent monetary and financial developments, the identification of different channels by which the money supply diffuses its impact on the real economy, including GDP and inflation, remains elusive [1]. Even though MPTMs vary by region, previous studies have identified six channels: credit channel (CC), asset price channel (APC), exchange rate channel (ERC), interest rate channel (IRC), bank lending channel (BLC), and balance sheet channel (BSC) [3]. According to [3,4,5,6] BLC and BSC are collectively given the name of credit channel (CC).

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