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<p>Although measuring monetary policy is a contentious issue in the literature, much less evidence on this issue is available for emerging economies. This paper aims to investigate the role of interest rate and money supply in measuring monetary policy in twelve emerging economies that target inflation through the analysis of Granger causality, impulse response function, and forecast error variance decomposition. The empirical results show that both money supply and interest rate are useful predictors for changes in inflation. Moreover, both show a comparable power to explain the variation of inflation. However, a rise in interest rate increases rather than decreases inflation, whereas money supply has a positive and expected effect on inflation. These findings suggest that interest rate may not fully capture the overall stance of monetary policy or interest rate has a limited effect on inflation.</p>
</abstract>

Although measuring monetary policy is a contentious issue in the literature, much less evidence on this issue is available for emerging economies. This paper aims to investigate the role of interest rate and money supply in measuring monetary policy in twelve emerging economies that target inflation through the analysis of Granger causality, impulse response function, and forecast error variance decomposition. The empirical results show that both money supply and interest rate are useful predictors for changes in inflation. Moreover, both show a comparable power to explain the variation of inflation. However, a rise in interest rate increases rather than decreases inflation, whereas money supply has a positive and expected effect on inflation. These findings suggest that interest rate may not fully capture the overall stance of monetary policy or interest rate has a limited effect on inflation.

Measuring monetary policy by money supply and interest rate: evidence from emerging economies

Faculty of Economics and Business Administration

Review of Economic Perspectives

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Although measuring monetary policy is a contentious issue in the literature, much less evidence on this issue is available for emerging economies. This paper...

Measuring monetary policy by money supply and interest rate: evidence from emerging economies

Published Online: Sep 17, 2021

Page range: 347 - 367

Received: May 25, 2020

Accepted: Jun 30, 2021

DOI: https://doi.org/10.2478/revecp-2021-0015

Keywords
monetary policy instruments, interest rate, money supply, emerging economies

© 2021 Trung Thanh Bui et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Measuring monetary policy by money supply and interest rate: evidence from emerging economies

Published Online: Sep 17, 2021

Page range: 347 - 367

Received: May 25, 2020

Accepted: Jun 30, 2021

DOI: https://doi.org/10.2478/revecp-2021-0015

Keywordsmonetary policy instruments, interest rate, money supply, emerging economies

© 2021 Trung Thanh Bui et al., published by Sciendo

This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Keywords
monetary policy instruments, interest rate, money supply, emerging economies