Three essays on monetary policy analysis in Mongolia
This thesis presents three papers on monetary policy analysis for Mongolia. The first paper measures the lagged effect of the monetary transmission mechanism on inflation and output in Mongolia using a sign-restricted structural vector autoregression (SVAR). We find the following results. First, the lag of the monetary transmission mechanism is about 4 to 12 months for Mongolia. Second, monetary policy shocks play a modest role in explaining output and inflation fluctuations. Third, in response to a monetary policy shock, the exchange rate immediately overshoots its long-run equilibrium rate, a finding consistent with Dornbusch's (1976) famous exchange rate overshooting hypothesis. Fourth, the historical decomposition analysis suggests that besides monetary policy shocks, output fluctuations are largely driven by aggregate supply shocks while inflation is largely driven by oil price and money demand (LM) shocks. The second paper develops an empirical model for inflation in Mongolia using both Bayesian and classical approaches. In particular, we first estimate long-run markup and money demand relationships using cointegration procedures, and then construct a single-equation error correction model of inflation with possible nonlinearity. The main findings of the paper are summarized as follows. First, the main determinant of inflation is the markup, capturing the impact from unit labor costs, petroleum prices, import prices and the exchange rate. Second, money matters for inflation: excess narrow{u00AD} money supply seems to determine inflation in the long-run if the model uncertainty and nonlinearity are considered, but adjustment to disequilibria is slow. Third, sustained increases in wages together with petroleum price shocks explain the high and volatile inflation in recent years. We also find two inflationary regimes that are characterized by a degree of inflation persistence. The third paper estimates the reaction function of the Bank of Mongolia using a Bayesian approach. It addresses this issue by estimating the New Keynesian dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main findings of the paper are as follows. First, the monetary policy reaction function is forward looking in terms of the inflation rate. Second, the central bank of Mongolia has implemented a strong anti-inflationary and exchange rate stabilization policy. Third, there is evidence that the Bank of Mongolia does not respond to output.
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