INVESTIGATION OF THE MONETARY POLICY TRANSMISSION MECHANISM IN DEVELOPED ECONOMIES

Abstract

By employing second generation unit root tests, Westerlund cointegration analysis and GMM estimation, this study investigates dynamics of inflation in the G7 countries from 2000 to 2023. This has as its other objectives, to examine the cointegration among inflation and other macroeconomic variables such as interest rates, exchange rates, GDP growth as well labor. The results show large inflation persistence and confirm the role of interest rates in controlling inflationary pressure, consistent with theory in monetary policy. The analysis also shows the effect of exchange rate fluctuations on inflation and the role of economic growth in restraining inflation. The results imply the need for an integrated policy response that includes active use of monetary tools, equilibrium exchange rate, and measures aimed at preserving sustainable economic growth. Through these insights we gain a better understanding of the role played by inflation dynamics in the G7 and gain useful implications for policymakers as they seek to make systems more stable.

Keywords: Exchange rates; Interest rates; Inflation; Institutional quality; Panel data