Stabilization effects of narrative-based monetary policy in Jamaica created by Edward E. Ghartey and Tom M. Amonde

The study constructs a monetary policy indicator (MPI) from monetary policy documents and the actions of the Bank of Jamaica and Ministry of Finance and Economic Planning, and uses it to estimate four variants of an analytical narrative-vector error correction model (AN-VECM) with cointegration as the identifying restriction. In AN-VECMs 1 and 2, the cointegration is estimated in level form with respective short-term interest rate and the MPI as regressands. The first difference forms of respective models are re-estimated in AN-VECMs 3 and 4. The results are mixed, with AN-VECM 1 yielding the least results. However, in all cases, the impulse response functions indicate that the MPI yields slightly superior results in both AN-VECMs 2 and 4. A positive shock in the MPI produces price and exchange rate results which are consistent with a priori expectations from economic theory, and mixed liquidity effect and real output results. Thus, the MPI provides an important policy tool alternative for policymakers in small open economies to consider in the implementation of monetary policy.