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Journal cover: Studies in Economics and Finance

Studies in Economics and Finance

ISSN: 1086-7376

Online from: 1977

Subject Area: Accounting and Finance

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An analysis of Fiji's monetary policy transmission

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Title:An analysis of Fiji's monetary policy transmission
Author(s):Paresh Kumar Narayan, (School of Accounting, Economics and Finance, Deakin University, Burwood, Australia), Seema Narayan, (School of Economics, Finance, and Marketing, RMIT University, Melbourne, Australia), Sagarika Mishra, (School of Accounting, Economics and Finance, Deakin University, Burwood, Australia), Russell Smyth, (Department of Economics, Monash University, Melbourne, Australia)
Citation:Paresh Kumar Narayan, Seema Narayan, Sagarika Mishra, Russell Smyth, (2012) "An analysis of Fiji's monetary policy transmission", Studies in Economics and Finance, Vol. 29 Iss: 1, pp.52 - 70
Keywords:Developing countries, Fiji, Monetary policy, Structural VAR model
Article type:Research paper
DOI:10.1108/10867371211203855 (Permanent URL)
Publisher:Emerald Group Publishing Limited

Purpose – The purpose of this paper is to examine the monetary policy transmission mechanism for the Fiji Islands using a structural vector autoregressive (SVAR) model for the period 1975 to 2005.

Design/methodology/approach – The SVAR model investigates how a monetary policy shock – defined as a temporary and exogenous rise in the short-term interest rate – affects real and nominal macro variables; namely real output, prices, exchange rates, and money supply.

Findings – The results suggest that a monetary policy shock statistically significantly reduces output initially, but then output is able to recover to its pre-shock level. A monetary policy shock generates inflationary pressure, leads to an appreciation of the Fijian currency and reduces the demand for money. The paper also analysed the impact of a nominal effective exchange rate (NEER) shock (an appreciation) on real output and found that it leads to a statistically significant negative effect on real output.

Practical implications – The findings of this study should be of direct relevance to the research and policy work undertaken at the Reserve Bank of Fiji.

Originality/value – For a small economy, such as Fiji, where monetary policy is key to sustainable macroeconomic management, this is the first paper that undertakes a dynamic analysis of monetary policy transmission. The paper uses time series data over three decades and builds a structural VAR model, rooted in theory. This paper will be of direct relevance to the Reserve Bank of Fiji. The approach and model proposed will also be useful for applied monetary policy researchers in other developing countries where inflation rate targeting is a key element of the monetary policy setting.

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