Financial stability aspects of monetary policy transmission in developing countries: empirical evidence from Kazakhstan
Ybrayev Z.
7 June 2022Emerald Group Holdings Ltd.
International Journal of Development Issues
2022#21Issue 2195 - 217 pp.
Purpose: This study aims to determine whether the transmission of monetary policy to the real economy depends on the structural conditions of financial stability. In particular, the paper shows that the effects of shocks to financial stability on output and inflation is conditional on the state of credit in the economy, measured broadly as a credit-to-GDP. Design/methodology/approach: The authors use a threshold vector autoregression model with Bayesian techniques to investigate the impact of private nonfinancial sector credit on the dynamic relationship between financial conditions, monetary policy transmission mechanism and macroeconomic performance in Kazakhstan from 2005:Q1 to 2020:Q1. Findings: In the modeled threshold vector autoregression (VAR) specification, the authors document that when the credit-to-GDP gap is low or the credit is below its trend, an increase to the interest rate leads to a short-term economic expansion. However, when the credit-to-GDP gap is high or the nonfinancial credit is above its trend, a tightening in monetary policy leads to an economic contraction with domestic financial conditions being weaker compared to a low credit environment. Originality/value: The outcome is consistent with the related literature, which argues that a more sustained increase in credit is followed by a sharper economic contraction, but only when the economy is in the high credit state. These results highlight that financial stability measures (e.g. credit state) is important to take into account when conducting monetary policy in emerging economies.
Credit , Credit-to-GDP , Developing countries , Financial stability , Kazakhstan , Monetary policy
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Department of Financial Stability and Research, National Bank of Kazakhstan, Nur-Sultan, Kazakhstan
Department of Financial Stability and Research
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