Monetary Transmission Mechanism in the East African Community: An Empirical Investigation

Author/Editor:

Hamid R Davoodi ; S. V. S. Dixit ; Gabor Pinter

Publication Date:

February 6, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Do changes in monetary policy affect inflation and output in the East African Community (EAC)? We find that (i) Monetary Transmission Mechanism (MTM) tends to be generally weak when using standard statistical inferences, but somewhat strong when using non-standard inference methods; (ii) when MTM is present, the precise transmission channels and their importance differ across countries; and (iii) reserve money and the policy rate, two frequently used instruments of monetary policy, sometimes move in directions that exert offsetting expansionary and contractionary effects on inflation—posing challenges to harmonization of monetary policies across the EAC and transition to a future East African Monetary Union. The paper offers some suggestions for strengthening the MTM in the EAC.

Series:

Working Paper No. 2013/039

Subject:

Central bank policy rate Credit Econometric analysis Exchange rates Financial services Foreign exchange Monetary base Money Vector autoregression

English

Publication Date:

February 6, 2013

ISBN/ISSN:

9781475530575/1018-5941

Stock No:

WPIEA2013039

Pages:

59

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