External shocks dynamics and the effectiveness of monetary policy transmission channels in SSA countries
Keywords:
Monetary Policy Transmission Channels, External Shocks Dynamics, Financial Development and Recursive-Structural Vector Autoregression (RSVAR)Abstract
This study examined the extent to which the external shocks influence the monetary policy transmission mechanisms in the Sub-Saharan African countries in the periods between 1980 and 2024. The Recursive Structural Vector Autoregressive (RSVAR) modelling approach was employed to capture the dynamic interactions, analyse the interactive effects among the key variables and ascertain the most active and greatest channels of the effective monetary policy transmission shocks in the SSA countries. The study revealed the stationarity of the variables at the levels and established the existence of long run relationships among the variables. The study found that monetary policy transmission effectiveness in SSA is mostly affected and largely influenced by the external shocks from financial sector development, macroeconomic variable performance and the financial institution development index, while the shocks originating from financial market development index variable constituted the least active transmission channel and shock. This therefore, suggests that active monetary policy transmissions and monetary policy effectiveness are largely influenced by shocks from both financial sector development and macroeconomic performance in SSA. Central banks and monetary authorities should thus, adopt an adequate appropriate policy that would leverage the shocks from financial development and macroeconomic performance in order to reduce the influence of these shocks and boost the monetary policy transmission effectiveness in the SSA and developing countries.
References
Aysun, U., Brady, R., & Honig, A. (2013). Financial frictions and the strength of monetary transmission. Journal of International Money and Finance, 32, 1097–1119. https://doi.org/10.1016/j.jimonfin.2012.09.003
Bernanke, B., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives, 9(4), 27–48. https://doi.org/10.3386/w5146
Carranza, L., Galdon-Sanchez, J., & Gomez-Biscarri, J. (2010). Understanding the relationship between financial development and monetary policy. Review of International Economics, 18(5), 849–864. https://doi.org/10.1111/j.1467-9396.2010.00926.x
Cecchetti, S. G., Flores-Lagunes, A., & Krause, S. (2006). Has monetary policy become more efficient? A cross-country analysis. The Economic Journal, 116(511), 408–433. https://doi.org/10.1111/j.1468-0297.2006.01089.x
Christensen, B. V. (2016). Have monetary transmission mechanisms in Africa changed? BIS Working Papers, No. 56. Bank for International Settlements. https://www.bis.org/publ/work56.pdf
Effiong, E., Esu, G., & Chuku, C. (2017). Financial development and monetary policy effectiveness in Africa. MPRA Paper, No. 79732. https://mpra.ub.uni-muenchen.de/79732
Gertler, M., & Gilchrist, S. (1995). The role of credit market imperfections in the monetary transmission mechanism: Arguments and evidence. Scandinavian Journal of Economics, 95(1), 43–64. https://doi.org/10.2307/3440134
Gurley, J. G., & Shaw, E. S. (1955). Financial aspects of economic development. American Economic Review, 45(4), 515–538.
Gurley, J. G., & Shaw, E. S. (1967). Financial structure and economic development. Economic Development and Cultural Change, 15(3), 257–268. https://doi.org/10.1086/450226
Ireland, P. N. (2005). The monetary transmission mechanism. FRB of Boston Working Paper No. 06-1. https://doi.org/10.2139/ssrn.798806
Jannsen, N., Potjagailo, G., & Wolters, M. (2019). Monetary policy during financial crises: Is the transmission mechanism impaired? International Journal of Central Banking, 15(4), 81–126.
Karim, Z. A., Zaidi, M. A. S., & Karim, B. A. (2013). Monetary policy shocks, financial constraints and firm-level equity return: Panel evidence. Jurnal Pengurusan, 39, 51–63. https://doi.org/10.17576/pengurusan-2013-39-05
Kashyap, A. K., & Stein, J. C. (1995). The impact of monetary policy on bank balance sheets. Carnegie-Rochester Conference Series on Public Policy, 42, 151–195. https://doi.org/10.1016/0167-2231(95)00032-U
Kashyap, A. K., & Stein, J. C. (2000). What do a million observations on banks say about the transmission of monetary policy? American Economic Review, 90(3), 407–428. https://doi.org/10.1257/aer.90.3.407
Loutskina, E., & Strahan, P. E. (2009). Securitization and the declining impact of bank finance on loan supply: Evidence from mortgage originations. Journal of Finance, 64(2), 861–889. https://doi.org/10.1111/j.1540-6261.2009.01447.x
Mahmood-ur-Rahman. (2018). Financial development and monetary policy efficiency: Unraveling the empirical contradiction and discovering the true relation. Economics Bulletin, 38(1), 281–296.
Mishkin, F. S. (1995). Symposium on the monetary transmission mechanism. Journal of Economic Perspectives, 9(4), 3–10. https://doi.org/10.1257/jep.9.4.3
Mishkin, F. S. (1996). The channels of monetary transmission: Lessons for monetary policy. NBER Working Paper No. 5464. https://doi.org/10.3386/w5464
Mishra, P., Montiel, P. J., & Spilimbergo, A. (2012). Monetary transmission in low-income countries: Effectiveness and policy implications. IMF Economic Review, 60(2), 270–302. https://doi.org/10.1057/imfer.2012.7
Mullineux, A. (1994). Financial innovation and monetary policy in the United Kingdom. Review of Policy Issues, 2(1), 29–44.
Nkoro, E., & Uko, A. (2021). Monetary policy transmission mechanism and economic development: Evidence from Nigeria. International Journal of Economics, Commerce and Management, 9(5), 259–289.
Nwosa, P., & Saibu, O. (2012). The monetary transmission mechanisms in Nigeria: A sectoral output analysis. International Journal of Economics and Finance, 4(1), 204–212. https://doi.org/10.5539/ijef.v4n1p204
Orekoya, S. (2011). Monetary policy transmission mechanisms in Nigeria (Doctoral dissertation). University of Ibadan, Nigeria.
Oyaromade, R. (2002). Monetary policy transmission mechanism in Nigeria: A VECM approach. The Nigerian Journal of Economic and Social Studies, 44(2), 187–206.
Oyaromade, R. (2004). Credit rationing and the transmission mechanism of monetary policy in Nigeria (Doctoral dissertation). University of Ibadan, Nigeria.
Oyaromade, R. (2006). Monetary transmission mechanism, credit availability doctrine and credit rationing hypothesis: A literature survey. In Applied Macroeconomics and Economic Development (pp. 217–250). Ibadan: University of Ibadan Press.
Sa’ad, S., & Yakubu, A. (2016). A comparative study of the channels of monetary transmission mechanism and inflation targeting in Nigeria. Abuja Journal of Business and Management, 2(5), 143–151.
Thi, L., & Ho, L. (2022). Financial development: Is it an advantage or obstacle for monetary policy? Journal of Advances in Management Research, 19(3), 349–366. https://doi.org/10.1108/JAMR-03-2021-0103
