Factors That Influence a Monetary Policy

IV. An important issue to be considered in the theoretical framework is how much variables are needed to properly capture the effect of policy innovation. Bai and Ng (2002) provides guidance, but does not specify the number of variables that should be present in VAR. In order to explore the effect of policy innovation, we study six variables. We use the VAR method to estimate the model. Sims (1980) introduced the VAR method as a measure of the effect of monetary policy.

Exchange rates are one of the core elements that affect monetary policy in developing countries. The country can choose to use an intermediate system such as fixed exchange rate (single or multiple currency pegs), (adjustable or crawl hook), or flexible exchange rate. This depends on money supply rate and self-sufficiency of currency. In any developing institution, exchange rates are usually determined by comparing measured values ​​with currencies of other healthy economies. In this article, developing countries review options that can be used to determine which exchange policy is best for them. The impact of dollarization and currency alliance in developing countries will also be studied. "According to the International Monetary Fund (IMF), about 85% of developing countries had fixed exchange rate arrangements before the collapse of the Bretton Woods regime"

Monetary policy is the process by which the national monetary authorities manage money supply to promote stable employment, price and economic growth. Monetary policy affects the economy, but it can not directly control the economy. Any limit can be achieved by monetary policy. Below are some factors that could make monetary policy inefficient. Monetary policy may affect the factors above, but it is not just about it. Fiscal policy also directly affects employment and economic growth. If the two policies are not adjusted, they can cancel each other. This is a particularly important issue if fiscal policy and monetary policy are controlled by two different political parties. Some Parties think that the economy is in a depression and may adopt an expanded policy. Other groups may think that the economy is growing rapidly and adopting austerity policies