The Impact of Trade Openness on the Effectiveness of Monetary Policy : A Cross-Country Analysis
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This paper evaluates the relationship between a nation’s openness to trade and the effectiveness of its monetary policy in stimulating output. Using annual data from the 1945-2009 for 172 IMF member countries, country by country estimation results were obtained. The findings across most of countries indicate that the effects of monetary policy on output are negatively affected by the economy’s degree of trade openness. Therefore, policy makers should take into account the extent to which their nations are exposed to international trade when formulating monetary policy. Variations, however, were observed when the benchmark results were controlled by the groups of trading blocs, non-hyperinflation, and advanced, developing, fixed and flexible exchange countries. Pooling all countries together, we observe that only in the sub-period 2000-2009, consistent results with theory were obtained although their statistical significance was not much strong. In nations without a track record of prolonged inflationary periods, strong statistical significance for the negative coefficient TO in the sub-period 2000-2009, however, proves that their monetary policy effectiveness is reduced in the face of openness. Advanced economies see their monetary policy effective only in the sub-period 2000-2009, but, for the same sub-period, the statistical significance for the TO coefficient is low. Compared to advanced economies, developing economies are more likely to stimulate output via monetary policy and see their stimulation power weakened as trade openness rises throughout the time period until they reach the sub-period 2000-2009. In the sub-period 2000-2009, developing nations present nebulous effects of monetary policies as proven by low values and low statistical significance of the M2 coefficient, and the wrong sign of the TO coefficient. Monetary policy has been proven largely ineffective in countries with fixed exchange rate schemes.
Abstract
This paper evaluates the relationship between a nation’s openness to trade and the effectiveness of its monetary policy in stimulating output. Using annual data from the 1945-2009 for 172 IMF member countries, country by country estimation results were obtained. The findings across most of countries indicate that the effects of monetary policy on output are negatively affected by the economy’s degree of trade openness. Therefore, policy makers should take into account the extent to which their nations are exposed to international trade when formulating monetary policy. Variations, however, were observed when the benchmark results were controlled by the groups of trading blocs, non-hyperinflation, and advanced, developing, fixed and flexible exchange countries. Pooling all countries together, we observe that only in the sub-period 2000-2009, consistent results with theory were obtained although their statistical significance was not much strong. In nations without a track record of prolonged inflationary periods, strong statistical significance for the negative coefficient TO in the sub-period 2000-2009, however, proves that their monetary policy effectiveness is reduced in the face of openness. Advanced economies see their monetary policy effective only in the sub-period 2000-2009, but, for the same sub-period, the statistical significance for the TO coefficient is low. Compared to advanced economies, developing economies are more likely to stimulate output via monetary policy and see their stimulation power weakened as trade openness rises throughout the time period until they reach the sub-period 2000-2009. In the sub-period 2000-2009, developing nations present nebulous effects of monetary policies as proven by low values and low statistical significance of the M2 coefficient, and the wrong sign of the TO coefficient. Monetary policy has been proven largely ineffective in countries with fixed exchange rate schemes.
참고문헌 (24)
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