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Do monetary shocks cause regional prices to go bananas?

2 Jul 2012

This thesis intends to investigate the asymmetric effects of monetary policy on regional prices within Fiji. The monetary policy shocks are generated by removing any systemic response to future economic conditions from the actual policy rate that is set by the Reserve Bank of Fiji (RBF). This method of generating shocks involves utilizing the data and forecasts that the Reserve Bank of Fiji (RBF) employs when implementing monetary policy, thus ensuring that any systematic response to future economic conditions by the RBF is controlled for. Regional prices are then subjected to monetary shocks to gauge whether these regional prices respond asymmetrically to a common monetary shock. The results reveal that regional prices do respond asymmetrically within the first eighteen months after the initial monetary shock. However the effects of the monetary shocks generally did not have any long term effects. Furthermore, the resulting regional inflation differentials, which varied in the short run, tended to dissipate within the first twelve months after the initial monetary shock. These results bode well for policy makers as the welfare consequences associated with long term regional inflation differentials are negligible.

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