Volume: 7 Issue 4 [April 2024]

Article:Understanding the Transmission Mechanism of Monetary Policy in Laos: A Comparative Analysis of Dynamic Stochastic General Equilibrium (DSGE) Models and Time Series Analysis of Macroeconomic Indicators

Author: Lamtiane Khoutphilavanh

Volume: Vol 7, Issue 4; April 2024

DOI: North American Academic Research, 7(4) 134-185 April 2024, https://doi.org/10.5281/zenodo.11220745

Abstract: This study comprehensively investigates the transmission mechanism of monetary policy in Laos through two complementary approaches: a Dynamic Stochastic General Equilibrium (DSGE) model framework and time series analysis of macroeconomic indicators. The DSGE model incorporates structural features of the Lao economy, such as the presence of an informal sector and dollarization, allowing for a holistic examination of how monetary policy shocks propagate and affect key macroeconomic variables. Concurrently, the time series analysis employs various econometric techniques, including ARIMA, VAR, and SVAR models, to empirically identify the potency of different transmission channels.The findings highlight the credit channel and the interest rate channel as the most significant monetary policy transmission channels in Laos, supported by both modeling approaches. The DSGE model further emphasizes the importance of accounting for the informal sector and dollarization in shaping the transmission mechanism. The exchange rate channel exhibits a moderate effect, while the asset price channel plays a limited role due to the underdeveloped financial markets.The study reveals that monetary policy in Laos has been moderately effective in achieving price stability and economic growth objectives, with potential structural breaks or regime shifts identified over time. However, the effectiveness is constrained by factors such as the underdeveloped financial sector, high dollarization, and external shocks on domestic inflation dynamics.The research contributes to the understanding of monetary policy transmission in Laos and provides tailored policy recommendations for enhancing monetary policy effectiveness. These include prioritizing specific transmission channels, implementing financial sector reforms, strengthening policy coordination and communication, and considering the unique structural characteristics of the Lao economy.

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