Monetary Policy Frameworks for Emerging Markets

Monetary Policy Frameworks for Emerging Markets

Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad

Financial globalization has made monetary policy formulation in emerging market economies increasingly complicated. This timely set of studies looks at the turmoil in global financial markets, which coupled with volatile inflation poses serious challenges for central banks in these countries. Featuring papers from the research frontier and front-line policymakers in developing and emerging market economies, the book addresses questions such as ‘What monetary policy framework is most suitable for these countries to confront the new challenges while they continue to open up to trade and financial flows?’, ‘What are the linkages between monetary stability and financial stability?’ and ‘Is inflation targeting or a fixed exchange rate regime preferable for developing and emerging markets?’

Chapter 14: Regional Asymmetries in the Impact of Monetary Policy on Prices: Evidence from Africa

David Fielding

Subjects: development studies, development economics, economics and finance, development economics, money and banking


David Fielding INTRODUCTION 14.1 It is known that there are substantial deviations from the Law of One Price across regions or cities within Organisation for Economic Co-operation and Development (OECD) countries (Parsley and Wei, 1996; Engel and Rogers, 2001; Ceglowski, 2003). Although deviations in the prices of specific consumer goods at the barcode level may be small, regional variations in consumption patterns lead to much larger deviations at higher levels of aggregation, for example at the level of a US Bureau of Labor Statistics (BLS) expenditure category. Moreover, deviations in regional services prices can be substantial. Convergence towards intra-national purchasing power parity happens very slowly; the half-life of deviations from the Law of One Price across US cities is estimated to be about nine years (Cecchetti et al., 2002). These deviations may be caused partly by factors entirely outside the control of any policymaker, for example by asymmetric regional supply shocks, and may not represent any particular economic inefficiency. However, there is also evidence that regional deviations from the Law of One Price are partly caused by asymmetric responses to federal monetary policy. Clausen (2001), Fountas and Papagapitos (2001) and Putkuri (2003) among others discuss regional asymmetries in monetary transmission in euroland; Fielding and Shields (2007) discuss similar asymmetries in the US. Such asymmetries have important consequences for monetary policy design, and substantial welfare losses can arise if policy is based only on aggregate data (De Grauwe, 2000; Gros and Hefeker, 2002; Nolan, 2002; De Grauwe and Sénégas,...

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