A VAR Analysis of Kenya's Monetary Policy Transmission Mechanism: How Does the Central Bank's Repo Rate Affect the Economy?

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... A significant modern trend in this subject has been the empirical analysis of the effects of monetary policy shocks, commonly characterised as a transient and exogenous increase in a short-term interest rate, on production, prices, exchange rates, and other key economic variables (K. C. Cheng, 2007). ...
... The findings suggested that monetary policy was more efficient during the repo period, which the use of an inflation-targeting framework could explain. K. C. Cheng (2007) conducted a VAR analysis of Kenya's monetary policy's transmission mechanism to ascertain the economic impact of the central bank's repo rate. The study analysed annual time series data from 1997 to 2005. ...
... In South Africa, a statistically negligible positive correlation exists between actual interest rates and economic progress over the near term, as indicated by a t-statistic of 1.18, less than the crucial value of 2. In the short run, a 1% increase in South Africa's actual interest rates will result in a minuscule 0.17% gain in economic growth, ceteris paribus. These findings corroborate Fadiran et al. (2013), Precious (2014),Kosi's Cheng's (2007), and Thomas et al. (2018) (Akalpler et al., 2018). These data suggest that actual interest rates contribute positively to the South African economy's growth. ...
... There are diverse strands of empirical literature that relate to liquidity management: those that relate to the transmission mechanism of monetary policy (Bagliano and Favero, 1997;Pétursson, 2001;Boivin and Giannoni, 2002;Atchariyachanvanich, 2004;Lang and Krznar, 2004;Dabla-Norris and Floerkemeier, 2006;Cheng, 2006;Ngalaw, 2009;Mezui-Mbeng, 2010;Sidaoui and Ramos-Francis 2010;Tsangarides, 2010 andCecioni andNeri, 2011) and those that relate to the impact of excess liquidity on monetary policy effectiveness (Saxegaard, 2006;Kamgna and Ndambendia, 2008;Kheraj, 2007Birdwood, 2009and Bathaluddin, 2011. While the works on the transmission mechanism are acknowledged as they shed lights on the strength of the transmission, the impact of the excess liquidity on effectiveness of monetary policy is more relevant as the liquidity management issues are implied. ...
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Liquidity management in Central African Economic and Monetary Community - CEMAC region has been constrained by the existence and growth of excess liquidity. The existence and growth of excess liquidity adversely affect the effectiveness of monetary policy. Existence and growth of excess liquidity are aggravated by information gap regarding measure, trends (persistence and volatility) of excess liquidity and strength of the transmission mechanism of monetary policy. The trends and the transmission mechanism of monetary policy are vital in determining the effectiveness of monetary policy. Base on the aforementioned, the study undertook a country level as well as CEMAC level analysis of the trend of excess liquidity, evaluated the strength of the transmission mechanism, and the framework for liquidity management and its effectiveness in CEMAC member States and in the CEMAC Zone. Excess liquidity was measured using the measure of monetary overhang computed as actual money growth minus reference money growth; while the trend of excess liquidity was analyzed using graphs, period means, and coefficient of variation. To analyze the strength of the transmission mechanism and to evaluate the effectiveness of monetary policy in the CEMAC Zone, first the conceptual framework for monetary policy in the CEMAC Zone was developed. The conceptual framework showed a dominant monetary programming framework and a transmission mechanism. The framework influenced the specification of the econometric models used to evaluate the strength of the transmission of monetary policy variables. The study found that the CEMAC Zone experienced tight liquidity and high volatility before 1994 (pre-devaluation period). However, in 1994 (post devaluation period), excess liquidity has persisted while volatility had moderated. The ARCH and GARCH results showed that the strength of transmission mechanism of monetary policy is strong in Cameroon, Congo Republic, Equatorial Guinea and Gabon and in CEMAC; but weak in Central African Republic and Chad. The framework can therefore be used to manage excess liquidity in Cameroon, Congo Republic, Equatorial Guinea, Gabon and CEMAC. However, for Central African Republic and Chad, transmission mechanism has to be developed. The results also show that liquidity management has been compromised by the profit making goal of the Central Bank and there is also lack of government securities for open market operations. To achieve their profit making goals, the central bank has offered governments unattractive interest rates which have caused governments to keep deposits with commercial banks. Based on the results, it is recommended that: first, governments need to be motivated with high interest rates, this could encourage them to place their excess reserves with Central Bank of Central Africa States BEAC. Second, BEAC needs to provide securities for sterilization and monetization as instruments for open market operations. Lack of securities and instruments affects the conduct of monetary policy on the part of BEAC. Third, BEAC also needs to change their orientation from profit making to liquidity management. The three recommendations should be implemented simultaneously to improve the effectiveness of monetary policy in the CEMAC Zone. Finally, Central African Republic and Chad must develop their financial markets to strengthen their transmission mechanism.
The chapter looks into monetary policy impact on macroeconomic performance in Tanzania, with a particular focus cast on price stability. The structural vector error correction (SVEC) model is used to analyze data from Tanzania for the period 1966–2019. The results show that monetary policy in the country is effective in terms of its single objective of price stability. The reason is that both the SVEC impulse responses and error variance decomposition show that most of the variations in the price level resulted from the policy rate, whose proxy is the discount rate, the Bank of Tanzania lending rate that anchors interest rates in the country. Thus, monetary policy significantly affects price developments. This scenario alludes to inflation as a monetary phenomenon. Therefore, the Bank of Tanzania influences macroeconomic performance by setting and monitoring the implementation of monetary policy in the country. The Bank of Tanzania undertakes reserve money programming as its monetary policy framework. However, because there is a significant relationship between the policy rate and price in the country, an important implication is that Tanzania can successfully use inflation targeting as its monetary policy framework for better macroeconomic results.KeywordsMacroeconomic performancePrice stabilityMonetary policyLending rateInflation
The study examines the impact of monetary policies on economic growth in Sierra Leone using time series data for 1980–2019. Specifically, the study determines how changes in monetary policy transmission through interest rates, reel effective exchange rate, credit to the private sector, and lending rates affect real GDP growth in the country. The relationship between real GDP and monetary policy variables is estimated using the Fully Modified Ordinary Least Square regression. The approach addresses the problem of endogeneity and serial correlation by allowing heterogeneity in the long-run parameter estimates. The diagnostic tests for unit root and cointegration revealed a long-run relationship among the variables, thus indicating a long-run equilibrium relationship. The results from the study show the strength of monetary policy interventions in promoting economic growth in Sierra Leone through real effective exchange rates and monetary sector credit to the private sector. The study also reveals that inflation and interest rate had the expected negative signs but are not effective monetary policy transmission channels. Understanding the effectiveness of how monetary policy channels work in Sierra Leone is critical for policy implementation that enhances output growth.KeywordsMonetary policyFiscal policyTransmission channelFMOLS approach
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The study investigates the nexus between military expenditure and macroeconomic performance in Nigeria between 1980 and 2017. Data on military expenditure and some macroeconomic variables such as output (GDP), exchange rate and inflation rate are used in the study. The Vector Auto-regression technique VAR is applied so as to study the interactions among the variables in the short run. The result shows that military expenditure in Nigeria is significantly influenced by output and exchange rate shocks. It was also revealed that military expenditure does not make significant contributions to the behaviour of output in Nigeria. Military expenditure appears to be insulated against inflation shock since the largest chunk of military expenditure is traded in foreign currency hence less affected by domestic prices.
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