An analysis of Fiji's monetary policy transmission

Narayan, Paresh Kumar, Narayan, Seema, Mishra, Sagarika and Smyth, Russell 2012, An analysis of Fiji's monetary policy transmission, Studies in economics and finance, vol. 29, no. 1, pp. 52-70, doi: 10.1108/10867371211203855.

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Title An analysis of Fiji's monetary policy transmission
Author(s) Narayan, Paresh KumarORCID iD for Narayan, Paresh Kumar
Narayan, Seema
Mishra, SagarikaORCID iD for Mishra, Sagarika
Smyth, Russell
Journal name Studies in economics and finance
Volume number 29
Issue number 1
Start page 52
End page 70
Total pages 9
Publisher Emerald Group Publishing Limited
Place of publication Bingley, England
Publication date 2012
ISSN 1086-7376
Keyword(s) Fiji
structural VAR model
monetary policy
developing countries
Summary 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.
Language eng
DOI 10.1108/10867371211203855
Field of Research 150202 Financial Econometrics
Socio Economic Objective 910104 Exchange Rates
HERDC Research category C1 Refereed article in a scholarly journal
Copyright notice ©2012, Emerald Group Publishing Limited
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Document type: Journal Article
Collections: Faculty of Business and Law
School of Accounting, Economics and Finance
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