Hidden Bibliographic Details
| Other authors / contributors: | Ding, Ding, 1958- author.
International Monetary Fund. Asia and Pacific Department.
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| ISBN: | 9781475533330
1475533330
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| Notes: | Title from PDF title page (IMF Web site, viewed Jul. 17, 2012).
"Asia and Pacific Department."
"July 2012."
Includes bibliographical references.
Print version record.
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| Summary: | Pacific Islands countries are vulnerable to commodity price shocks, and this poses challenges to monetary policy. The high degree of exchange rate pass-through to headline inflation and the weak monetary transmission mechanism in PICs suggest a greater efficacy of exchange rate changes in affecting inflation rather than monetary policy. To assess the tradeoff between the use of the exchange rate and monetary policy in macroeconomic stabilization, we employ a model-based approach to examine the optimal policy in response to the historical distribution of exogenous shocks in a Pacific Island (Tonga). The empirical evidence and model simulations tilt in the favor of exchange rate policy given the close relationship between exchange rate changes and headline inflation and the low interest rate sensitivity of aggregate demand.
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