Essays on Price Stickiness and its Monetary Policy Implications in Developing Economies

In Chapter 2, we empirically assess the existence and degree of price stickiness of a developing country using a store-level price dataset from Rwanda. Using the data, we establish five key findings. First, price changes are consistent across different months and no seasonality is observed in the data. Second, price changes are more frequent in Rwanda, compared to developed countries. However, item weights play a significant role to induce the high weighted frequency of price changes for Rwanda. Third, we observe that the duration of price spells in Rwanda is lower than in developed countries, though, there is a lot of heterogeneity among the commodity groups. Fourth, price decreases are almost as frequently observed as price increases, which is similar to findings from other studies. Fifth, the magnitude of price changes in Rwanda is higher compared to developed countries. Overall, we conclude that, due to the large role played by item weights, price stickiness in Rwanda, in general, is similar to what is observed in developed countries. In Chapter 3, we study staggered prices and monetary non-neutrality in a model of a developing economy. We develop a dynamic general equilibrium model of a developing economy with money but without bonds or private insurance. Such asset market imperfections are likely to affect the price-setting process, as it involves an intertemporal decision, under staggered prices. Using the model, we establish two key findings. First, following a monetary policy shock, aggregate output may pass through an oscillatory phase on the path towards the steady state. Second, there are heterogeneous effects on sectors leading to a persistent asymmetry in the economy. However, despite the greater intersectoral heterogeneity in the time paths of the variables which directly affect utility, there is greater intersectoral homogeneity of lifetime utility changes in a model of a developing economy in comparison to a model of an advanced economy. In Chapter 4, we study the effects of implementing an inflation targeting (IT) framework, which involves an interest rate rule, in a developing economy (DE). We develop a dynamic general equilibrium model of a DE by incorporating two sectors: a flexible-price or food sector, where households hold money but have no access to bonds or insurance, and a sticky-price or nonfood sector, where households hold money and have access to bonds and insurance. Following a monetary policy shock, either through an IT framework or a monetary aggregate targeting (MT) framework, we find that the increase in consumption levels is higher in the sticky-price sector compared to the flexible-price sector. However, the difference in consumption levels is higher under an IT framework, which suggests that, in terms of distributional implications, a MT framework may be more desirable than an IT framework in a DE

The Impact of Political Risk on Foreign Direct Investment

Political risk, like all other risks, has an adverse effect on any economy. Even though other forms of risk, such as economic risk and financial risk have been studied quite extensively, political risk has not received much attention owing primarily to lack of data. The current paper attempts to study a negative and significant relationship between political risk and Foreign Direct Investment (FDI), accounting for 94 countries over a span of 24 years from 1986-2009. It was found that most of the political risk indicators have a negative relationship with FDI for the world as a whole and also, the high-income countries but the relationship was the strongest for the upper middle-income countries

Macroeconomic Forces and Stock Prices:Evidence from the Bangladesh Stock Market

The study examines the influence of a selective set of macroeconomic forces on stock market prices in Bangladesh. The Dhaka Stock Exchange All-Share Price Index (DSI) is used to represent the prices in the stock market while deposit interest rates, exchange rates, consumer price index (CPI), crude oil prices and broad money supply (M2) are selected to represent the macroeconomic variables affecting the stock prices. Using monthly data from 1992m1-2011m6, several time-series techniques were used which include Cointegration, Vector Error Correction Model (VECM), Impulse Response Functions (IRF) and Variance Decompositions (VDC). Cointegration analysis, along with the VECM, suggests that interest rates, crude oil prices and money supply are positively related to stock prices, exchange rates are negatively related to stock prices, and CPI is insignificant in influencing the stock prices, in the long-run. Both the IRF and VDC suggest that shocks to macroeconomic variables explain a small proportion of the forecast variance error of the DSI, but these effects persist for a long period

Macroeconomic Forces and Stock Prices:Evidence from the Bangladesh Stock Market

The study examines the influence of a selective set of macroeconomic forces on stock market prices in Bangladesh. The Dhaka Stock Exchange All-Share Price Index (DSI) is used to represent the prices in the stock market while deposit interest rates, exchange rates, consumer price index (CPI), crude oil prices and broad money supply (M2) are selected to represent the macroeconomic variables affecting the stock prices. Using monthly data from 1992m1-2011m6, several time-series techniques were used which include Cointegration, Vector Error Correction Model (VECM), Impulse Response Functions (IRF) and Variance Decompositions (VDC). Cointegration analysis, along with the VECM, suggests that interest rates, crude oil prices and money supply are positively related to stock prices, exchange rates are negatively related to stock prices, and CPI is insignificant in influencing the stock prices, in the long-run. Both the IRF and VDC suggest that shocks to macroeconomic variables explain a small proportion of the forecast variance error of the DSI, but these effects persist for a long period

The Impact of Political Risk on Foreign Direct Investment

Political risk, like all other risks, has an adverse effect on any economy. Even though other forms of risk, such as economic risk and financial risk have been studied quite extensively, political risk has not received much attention owing primarily to lack of data. The current paper attempts to study a negative and significant relationship between political risk and Foreign Direct Investment (FDI), accounting for 94 countries over a span of 24 years from 1986-2009. It was found that most of the political risk indicators have a negative relationship with FDI for the world as a whole and also, the high-income countries but the relationship was the strongest for the upper middle-income countries