Monetary Transmission Mechanism in the East African Community: An Empirical Investigation
February 6, 2013
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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.
Subject: Central bank policy rate, Credit, Econometric analysis, Exchange rates, Financial services, Foreign exchange, Monetary base, Money, Vector autoregression
Keywords: central bank, Central bank policy rate, contractionary monetary policy, Credit, exchange rate, Exchange rates, Global, interest rate channel, Monetary base, Monetary policy, monetary policy authority, monetary policy shock, monetary policy transmission, money multiplier, policy rate, price level, reserve money, rising prices, transmission mechanism, Vector autoregression, vector autoregressions, WP
Pages:
59
Volume:
2013
DOI:
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Issue:
039
Series:
Working Paper No. 2013/039
Stock No:
WPIEA2013039
ISBN:
9781475530575
ISSN:
1018-5941
