Working Paper: NBER ID: w28536
Authors: Alina Carare; Carlos De Resende; Andrew T. Levin; Chelsea Zhang
Abstract: Microeconomic evidence indicates a very high frequency of price adjustment in low income countries (LICs), raising the question of whether LICs may be reasonably characterized as exhibiting monetary neutrality. To address this question, we analyze a cross-country panel dataset of 79 LICs over the period 1990 to 2015 to assess the impact of external shocks on real GDP growth, and we find highly significant differences between LICs where the central bank targets monetary aggregates or inflation compared to LICs that maintain rigid nominal exchange rates. We also conduct an event study of the surprise devaluation of the Central African Franc (CFA) in January 1994 and find that it had highly significant effects on the output growth of 10 CFA countries relative to 18 similar countries outside the CFA zone. Consequently, the hypothesis of monetary neutrality is decisively rejected, and these findings provide strong support for the role of monetary policy frameworks in fostering price stability and macroeconomic stability in LICs.
Keywords: No keywords provided
JEL Codes: E02; E52; E58; O23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| external shocks (F69) | real GDP growth (O49) |
| changes in world GDP (F62) | real GDP growth (O49) |
| terms of trade (F14) | real GDP growth (O49) |
| oil prices (L71) | real GDP growth (O49) |
| rigid nominal exchange rates (F31) | larger impact of external shocks on real GDP growth (F69) |
| monetary policy frameworks (E63) | real economic outcomes in LICs (O17) |
| CFA devaluation (F31) | output growth rates (O40) |
| CFA devaluation (F31) | differential effect on output growth rates compared to control group (O40) |