Effectiveness of monetary policy tools in a quasi-fixed exchange rate regime: SVAR evidence from the Maldives

Purpose This paper aims to examine the effectiveness of conventional monetary policy tools in the Maldives, with a focus on the indicative policy rate (IPR) and the minimum reserve requirement (MRR), in influencing output, inflation and credit in a small, open and fiscally constrained economy. Design/methodology/approach The study employs a Structural Vector Autoregression framework using quarterly data from 2012Q1 to 2024Q4. Monetary policy transmission is assessed through interest rate, credit and exchange rate channels. To capture overall policy stance in a multi-instrument framework, a Composite Monetary Policy Stance Index and an Effective Interest Rate are constructed and incorporated into the analysis. Findings The results indicate that monetary policy transmission in the Maldives is weak. The interest rate and exchange rate channels are largely inoperative. While the MRR exhibits a modest and relatively stronger short-run influence on private sector credit and lending rates compared to the IPR, its effects on output and inflation remain limited. The composite indicators confirm that structural constraints dominate the transmission mechanism. Practical implications From a policy perspective, the findings suggest that strengthening monetary transmission in the Maldives requires structural reforms, improved liquidity management and closer coordination between fiscal and monetary authorities. Originality/value The paper provides tool-based empirical evidence from a small island economy and introduces composite policy stance measures, contributing to the limited literature on monetary policy effectiveness under structural and fiscal constraints.