Measuring and Mending Monetary Policy Effectiveness Under Capital Account Restrictions — Lessons from Mauritania

Islamic Republic of Mauritania

“…We found no significant reaction of either inflation or the IPI to a policy rate shock. These results are consistent with those of Blotevogel (2013) who also found no evidence of monetary transmission in Mauritania. The variance decomposition of inflation shows that in the short-run (fourth quarter): (1) 75 percent of inflation variance is explained by its own shock, (2) shocks to economic activity can cause 19 percent of fluctuation in inflation, (3) shocks to broad money growth explain 5.8 percent of inflation variance, and (4) the policy rate plays almost no role in explaining inflation fluctuations (Figure 8).…”

“…Muted monetary transmission could lead to inflationary pressures in case of significant exchange rate adjustment. Blotevogel (2013) found no evidence of a statistically significant impact of exogenous monetary policy shocks on bank lending. Banks' concentrated loan portfolios and restricted BCM refinancing-due to the limited available collateral-were identified by the author as key constraints on effective monetary policy implementation and transmission.…”

“…However, because its financial resources were constrained, the BCM was unable to cover the costs of the needed ©International Monetary Fund. Not for Redistribution liquidity absorption operations and therefore refrained from undertaking them (Blotevogel, 2013). 2 Conversely, adverse exogenous shocks result in negative liquidity shocks as experienced during the 2014-15 and the COVID-19 shocks.…”

“…The two most common ways for banks' short-term refinancing are the interbank market and central bank refinancing. In Mauritania, both are constrained which creates incentives for banks to accumulate excess liquidity (Blotevogel, 2013).…”

“…One of the BCM's biggest assets is a non-tradable claim on the government, carrying below-market interest rates.Since the claim generates little revenue and cannot be traded with banks, it cannot be used in liquidity-absorbing operations(Blotevogel 2013). The BCM law foresees coverage of central bank losses by tradable government securities.3 Foreign company imports needed to expand their oil-related activities financed by foreign direct investment (FDI) increase the current account deficit but should not drive the exchange rate away from the level suggested by the fundamentals.…”