The Monetary Transmission Mechanism in the Tropics: A Narrative Approach

IMF Working Papers, September 20, 2013

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The Monetary Transmission Mechanism in the Tropics: A Narrative Approach

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Bibliographic details

• Authors: Andrew Berg, Luisa Charry, Rafael A Portillo, Jan Vlcek
• Published: September 20, 2013
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484398135.001

Summary and main findings

• Many central banks in low-income countries in Sub-Saharan Africa are modernising their monetary policy frameworks.
• Standard statistical procedures have had limited success in identifying the channels of monetary transmission in such countries.
• The paper adopts a narrative approach following Romer and Romer (1989), centering on a significant tightening of monetary policy that took place in 2011 in four members of the East African Community: Kenya, Uganda, Tanzania and Rwanda.
• The authors find clear evidence of the transmission mechanism in most of the countries examined.
• Deviations from expected transmission are argued to be explainable by differences in the policy regime in place.

Methodology

• Narrative approach inspired by Romer and Romer (1989) to identify a significant monetary policy tightening episode in 2011 across Kenya, Uganda, Tanzania and Rwanda.
• Focus on tracing channels of monetary transmission where standard statistical procedures were judged to have limited success.

Key themes, channels, and variables analyzed

• Banking
• Central bank policy rate
• Exchange rate arrangements
• Exchange rates (including nominal exchange rate and exchange rate pressure)
• Financial services and foreign exchange
• Inflation: headline inflation and core inflation
• Prices
• Short term interest rates
• Interest rate channel and interest rate transmission mechanism
• Monetary policy response and policy regime
• Economic structure and excess reserves

Policy implications and interpretation

• Modernisation of monetary policy frameworks in low-income Sub-Saharan African central banks can enhance identification of transmission channels.
• Narrative identification of policy shocks can reveal transmission where standard statistical methods fall short.
• Heterogeneous policy regimes across countries can account for deviations in the observed transmission of monetary policy.

Content in this bundle

• Box 1. EAC4 – Exchange Rate Arrangements and the Capital Account
  • Box 1. EAC4 – Exchange Rate Arrangements and the Capital Account (Markdown version)
  • Box 1. EAC4 – Exchange Rate Arrangements and the Capital Account (PDF)