Monetary policy transmission mechanism in Vanuatu

Amongst the 14 Pacific island countries, Vanuatu is unique in many respects. It has no exchange controls. Further, it allows full freedom for its citizens and resident expatriates alike to hold domestic bank deposits in any major currency of their choice. The country has adopted a fixed exchange rate regime, which in the absence of capital controls restricts full monetary independence. However, the Reserve Bank of Vanuatu has successfully established itself as a premier central bank in the region by pursuing the goals of monetary stability. This paper undertakes an empirical study of transmission mechanism of monetary policy in Vanuatu by resorting to a bounds testing approach.