The Transmission Mechanism for Monetary Policy in Developing Countries

Abstract

In many developing countries the financial system is characterized by the absence of organized markets for securities and equities, by capital controls, and by legal ceiling on bank borrowing and lending rates a situation that gives rise to parallel markets for foreign exchange and informal loan market. This paper analyzes how changes in monetary policy instruments are transmitted to domestic aggregate demand in a financially repressed economy. Such an analysis is necessary to understand how the move to a more market-oriented system would affect the economy in the short run.