Conduct of Monetary Policy in Fiji
THE CONDUCT OF MONETARY POLICY IN FIJI: POLICY FORMULATION, IMPLEMENTATION AND THE TRANSMISSION MECHANISM
Caroline Waqabaca Steve Morling Working Paper 99/01 June 1999 Economics Department Reserve Bank of Fiji Suva Fiji
The views expressed herein are those of the authors and do not necessarily reflect those of the Reserve Bank of Fiji.
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Abstract
This paper examines the formulation, implementation and transmission of monetary policy in Fiji. Monetary policy is formulated by the Reserve Bank of Fiji Board on recommendations from an internal Monetary Policy Committee. Monetary Policy is implemented using open market like operations in Reserve Bank securities to influence liquidity levels and to influence short-term money market interest rates. Monetary policy is transmitted to the BankÕs final objective Ð inflation Ð through commercial bank interest rates and through the real economy. The pass through of changes in policy interest rates to other short-term money market rates is quick. The pass through to commercial bank interest rates is slow but complete. This partly reflects the large proportion of longmaturing time deposits in commercial banksÕ funding base which delays the impact of monetary policy changes on banksÕ cost of funds and on lending rates. The transmission to the real sector is relatively strong and broadly in line with other countries. On average, a one percentage point rise in real short-term policy interest rates reduces the growth rate of the economy in the short-run on average by around one-third of one percentage point. The transmission lag is around one year. The transmission from the real sector to inflation is broadly in line with other countries. On average, a one percentage point rise in the output gap is associated with a 0.2 percentage point rise in inflation. However, the
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effect is roughly doubled when the indirect transmission through labour costs is included. The transmission lag is around one year. These estimates,
Caroline Waqabaca Steve Morling Working Paper 99/01 June 1999 Economics Department Reserve Bank of Fiji Suva Fiji
The views expressed herein are those of the authors and do not necessarily reflect those of the Reserve Bank of Fiji.
1
Abstract
This paper examines the formulation, implementation and transmission of monetary policy in Fiji. Monetary policy is formulated by the Reserve Bank of Fiji Board on recommendations from an internal Monetary Policy Committee. Monetary Policy is implemented using open market like operations in Reserve Bank securities to influence liquidity levels and to influence short-term money market interest rates. Monetary policy is transmitted to the BankÕs final objective Ð inflation Ð through commercial bank interest rates and through the real economy. The pass through of changes in policy interest rates to other short-term money market rates is quick. The pass through to commercial bank interest rates is slow but complete. This partly reflects the large proportion of longmaturing time deposits in commercial banksÕ funding base which delays the impact of monetary policy changes on banksÕ cost of funds and on lending rates. The transmission to the real sector is relatively strong and broadly in line with other countries. On average, a one percentage point rise in real short-term policy interest rates reduces the growth rate of the economy in the short-run on average by around one-third of one percentage point. The transmission lag is around one year. The transmission from the real sector to inflation is broadly in line with other countries. On average, a one percentage point rise in the output gap is associated with a 0.2 percentage point rise in inflation. However, the
2
effect is roughly doubled when the indirect transmission through labour costs is included. The transmission lag is around one year. These estimates,
References: Bewley, R.A. (1979). The Direct Estimation of the Equilibrium Response in a Linear Dynamic Model, Economic Letters, 3, pp. 357-361. Dewan, E., Hussein, S. and S.R. Morling (1999). ÒModelling Inflation Processes in FijiÓ, Reserve Bank of Fiji Working Paper 2/99. DeBrouwer, G. and N.R. Ericsson (1995). Modelling Inflation in Australia, Reserve Bank of Australia Research Discussion Paper 9510. Gruen, D. and G. Shuetrim (1994). Internationalisation and the Macroeconomy, Sydney. Hoggarth, G. (1997). Introduction to Monetary Policy, Handbooks in Central Banking, Centre for Central Banking Studies, Bank of England, London. Kremers, J.J.M., N.R. Ericsson and J.J. Dolado (1992). The Power of Cointegration Tests, Oxford Bulletin of Economics and Statistics, 54(3). Reserve Bank of Australia (1989). Proceedings of Economics Teachers Workshop, Sydney. Proceedings of a Conference, International Integration of the Australian Economy, Reserve Bank of Australia, 35