Monetary Policy in Low Income Countries in the Face of the Global Crisis: A Structural Analysis

Abstract

We develop a dynamic stochastic general equilibrium model with a banking sector to analyse the impact of the financial crisis in developing countries and the role of the monetary policy response, with an application to Zambia. We view the crisis as a combination of three related shocks: a worsening in the terms of the trade, an increase in the country's risk premium and a decrease in the risk appetite of local banks. Model simulations broadly match the path of the economy during this period. We derive policy implications for central banks, and for dynamic stochastic general equilibrium modelling of monetary policy, in low‐income countries.