Can a Rule-Based Monetary Policy Framework Work in a Developing Country? The Case of Yemen
International Monetary Fund, Jan 1, 2007 - Business & Economics - 28 pages
Monetary policy in Yemen is largely rudimentary and ad hoc in nature. The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. This paper argues in favor of a new formal monetary policy framework for Yemen emphasizing a proactive and rule-based approach with a greater direct focus on price stability in the context of a flexible management of the exchange rate. Although, as in many developing countries, institutional capacity is a concern, adopting a more formal framework could impel the kind of changes that are required to strengthen the ability of the CBY in achieving low and stable rates of inflation over the medium term.
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95 percent band affect inflation approach to monetary augmented Dickey-Fuller test auto-regression central bank Coefficient Statistic Coefficient conduct of monetary consumer price index demand in Yemen denote developing countries domestic prices effective exchange rate equation exchange rate changes exchange rate fluctuations exchange rate pass-through fiscal flexible exchange rate forecasting techniques Fund staff estimates growth rate impact of exchange inflation objective inflation rate inflation targeting inflationary information content instability of money interest rate rule lags Logarithm mean square error monetary aggregates monetary authorities monetary policy framework monetary policy rule monetary rule money demand function nominal effective exchange null hypothesis open market operations operating target opportunity cost output gap percent depreciation policy in Yemen price stability private sector proxies rate of broad reach an inflation real effective exchange regression relationship RMSE root mean square short-term interest rate specifications Statistic Coefficient Statistic Table I-1 test statistic transmission mechanism U.S. dollar