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Moldova’s Monetary Policy Transmission Channels Show Mixed Results

Introduction

In a new report, the International Monetary Fund (IMF) has analyzed the effectiveness of Moldova’s monetary policy transmission channels since the banking fraud crisis in 2014. The study found that while some channels have shown improvement, others remain weak.

Interest Rate Channel

The interest rate channel, which transmits changes in the policy rate to market rates, was found to be effective before the crisis but weakened after it. Key findings include:

  • Short-term pass-through from policy rate changes to market interest rates remained low.
  • Long-term transmission improved slightly.

Credit Channel

The credit channel, or bank lending channel, broke down after the crisis likely due to excess liquidity injected into the system. The study found that small banks, which are more likely to be liquidity constrained, were mainly responsible for the stable bank lending channel in the first subperiod.

Exchange Rate Channel

The exchange rate channel remains weak due to low capital mobility and exchange rate management. Key challenges include:

  • Moldova’s restricted capital account is a major constraint on monetary policy transmission.
  • The degree of exchange rate management is much higher at high frequencies, potentially harming warranted adjustments in the exchange rate.

Despite these challenges, the IMF study highlighted some positive trends, including:

  • The degree of exchange rate management in the medium term is moderate, but it is much higher at high frequencies.
  • Moldova’s level of exchange rate management is moderate at quarterly frequency and is well in line with IT emerging economies.

Conclusion

The IMF study concludes that while some monetary policy transmission channels have shown improvement, others remain weak. The report recommends careful evaluation and management of trade-offs between different goals, including reducing excess volatility in the exchange rate.

Accessing the Report

The full report can be accessed on the IMF’s website.

Note: I’ve used headings (##) to separate main sections, subheadings (###) for further subdivision, and bullet points (*) to list key findings.