Monetary policy and institutional quality

Meghan Hennessy Mihal, Fordham University


This dissertation seeks to link monetary policy and institutional quality, specifically for the case of developing countries. In an effort to demonstrate how monetary policy and institutional quality interact, I use the theoretical framework developed by Dimakou (2006). Through this theoretical model, I show that a positive change in the level of institutional quality for a nation beginning with a moderate level of institutional quality decreases the nation's inflation rate and increases the level of output. This theoretical framework provides motivation for a nation to consider improving their institutional quality. Following this theoretical development, I investigate a five-variable vector autoregression (VAR). I compare two “sets” of countries, each set including two countries: one set from Latin America (Colombia and Chile), and the other set from Southeast Asia (Indonesia and the Philippines). In each set there is a nation with high institutional quality (Chile and the Philippines) and a nation with low institutional quality (Colombia and Indonesia). The variables included in the investigation are each nation's measure of industrial production, inflation, the nominal effective exchange rate, monetary policy interest rate and its measure of institutional quality. I investigate both a shock to each nation's monetary policy interest rate and to each nation's level of institutional quality using impulse response functions. I find that a shock to the monetary policy interest rate creates statistically significant changes in macroeconomic aggregates for nations with low institutional quality. Additionally, when I shock the institutional quality measure, such that there is an increase in institutional quality, I find that industrial production increases and inflation decreases for nations with low institutional quality, as found in the theoretical model. ^

Subject Area

Economics, General

Recommended Citation

Mihal, Meghan Hennessy, "Monetary policy and institutional quality" (2009). ETD Collection for Fordham University. AAI3377051.