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Transmission Troubles

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Transmission Troubles

Heavy inflows of remittances impair a country’s ability to conduct monetary policy.

Finance & Development Magazine,

5 min read
5 take-aways
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Remittances create monetary policy difficulties for developing countries.

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8

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Recommendation

The central banks of developed economies can affect economic activity through the quality and efficacy of their “transmission mechanisms” that pass interest rate adjustments through to the broader economy. Alas, developing countries have not extracted the same benefits from monetary policies. Economists at the International Monetary Fund contend that the streams of cash coming into developing countries from their diasporas impair the transmission mechanism and render monetary policy ineffective. getAbstract recommends this astute report to officials, economists and executives interested in learning more about the drivers of an effective monetary policy apparatus.

Summary

Government monetary actions lead to economic results through a “transmission mechanism” that allows the short-term interest rates set by central banks to affect the cost of credit to domestic consumers and business. But studies have identified the impairment of the transition mechanism in many developing nations. A plausible hypothesis for this defect implicates remittances – the money emigrants send back to their home countries. A 2016 IMF analysis of the experiences of 58 emerging economies over the 1990–2013 period finds that “the direct effect of a [central...

About the Authors

Adolfo Barajas et al. are economists at the International Monetary Fund.

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