Monetary Policy Transmission under Inflation Targeting in Mongolia

This article aims to examine the monetary policy transmission mechanism under the inflation targeting in Mongolia for the period from June 2007 to August 2017 by applying a recursive vector-autoregressive model. Under the inflation targeting framework, the Bank of Mongolia has established the interest rate corridor since February 2013 for the purpose of improving the interest rate channel of the transmission mechanism. The study then contributes to the literature by assessing whether the interest rate corridor has really improved the policy rate transmission effects by comparing the effects between the pre-corridor period (from June 2007 to February 2013) and the post-corridor period (from March 2013 to August 2017). The main findings of this study are as follows. First, in the post-corridor period the effect of policy rate is clearly transmitted to the lending rate and inflation rate through the responses of interbank market rate, whereas the pre-corridor period does not represent any significant interest rate transmission effects. This outcomes implies that the interest rate corridor has contributed to enhancing monetary policy transmission mechanism. Second, the responses of exchange rate and industrial production to the policy rate shock are not significant even after the adoption of the interest rate corridor. This insignificance might come from the stick policy rate to stabilize the exchange rate, so-called a “fear of floating”.