## The Monetary Transmission Mechanism in the Tropics: A Narrative Approach

_IMF Working Papers, September 20, 2013_

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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

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### 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.

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## Content in this bundle

- **Box 1. EAC4 – Exchange Rate Arrangements and the Capital Account**
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  - [Box 1. EAC4 – Exchange Rate Arrangements and the Capital Account (PDF)](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2013/_wp13197.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/the-monetary-transmission-mechanism-in-the-tropics-a-narrative-approach-40955_