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Monetary Policy Transmission Mechanism in Moldova
Executive Summary
This report provides an analysis of the monetary policy transmission mechanism in Moldova, focusing on the channels through which changes in interest rates affect inflation and other macroeconomic variables. Our findings suggest that the effectiveness of monetary policy transmission has been compromised by various factors, including excess liquidity, a weakened bank lending channel, and a fragile exchange rate management.
Key Findings
Excess Liquidity
The injection of excess liquidity into the system may have diminished the effectiveness of monetary policy transmission. This suggests that efforts are needed to reduce excess liquidity in the system to restore the effectiveness of monetary policy transmission.
Bank Lending Channel
Before the banking crisis, the bank lending channel was operative; however, it broke down afterwards due to the injection of excess liquidity.
- Breakdown of bank lending channel post-banking crisis
- Potential need for policies to strengthen bank lending channel
Weak Exchange Rate Channel
Transmission via the exchange rate channel remains weak due to low capital mobility and exchange rate management. This highlights the need for careful evaluation and management of exchange rate volatility.
Deterioration in Short-Term Transmission
The analysis for 2009-2014 shows a serious deterioration in short-term pass-through to market rates, while long-term transmission remained intact.
- Need to address issues affecting short-term transmission
- Potential benefits of improving short-term transmission
Policy Implications
Reducing Excess Liquidity
Efforts may be needed to reduce excess liquidity in the system to restore the effectiveness of monetary policy transmission.
Improving Bank Lending Channel
Policies aimed at strengthening the bank lending channel, such as improving banking sector governance and reducing regulatory barriers, could help to revive its effectiveness.
Managing Exchange Rates
Careful evaluation and management of exchange rate volatility is necessary to balance the need for warranted macroeconomic adjustments with the need to reduce excess volatility.
Conclusion
The monetary policy transmission mechanism in Moldova requires attention and improvement to ensure effective implementation of monetary policy. Addressing these issues can help to restore the effectiveness of monetary policy transmission, promoting economic stability and growth.