Advanced Search
MyIDEAS: Login to save this paper or follow this series

Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices

Contents:

Author Info

  • Asongu Simplice

    ()
    (Yaoundé/Cameroun)

Abstract

Purpose – While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010. Design/methodology/approach – VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results. Findings – But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid. Practical Implications – A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed. Originality/value – By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.afridev.org/RePEc/agd/agd-wpaper/Does-money-matter-in-Africa.-New-empirics-on-Long-and-Short-run-Effects-of-Monetary-Policy-on-Output-and-Prices.pdf
File Function: Revised version, 2013
Download Restriction: no

Bibliographic Info

Paper provided by African Governance and Development Institute. in its series Working Papers with number 13/005.

as in new window
Length: 45
Date of creation: 14 Jan 2013
Date of revision:
Publication status: Forthcoming in Indian Growth and Development Review
Handle: RePEc:agd:wpaper:13/005

Contact details of provider:
Email:
Web page: http://www.afridev.org/index.php/en/
More information through EDIRC

Related research

Keywords: Monetary Policy; Banking; Inflation; Output effects; Africa;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Georgy Ganev & Krisztina Molnar & Krzysztof Rybinski & Przemyslaw Wozniak, 2002. "Transmission Mechanism of Monetary Policy in Centraland Eastern Europe," CASE Network Reports, CASE-Center for Social and Economic Research 0052, CASE-Center for Social and Economic Research.
  2. Saumitra N Bhaduri & S. Raja Sethu Durai, 2013. "A Note on Excess Money Growth and Inflation Dynamics: Evidence from Threshold Regression," Working Papers, Madras School of Economics,Chennai,India 2013-078, Madras School of Economics,Chennai,India.
  3. Rangan Gupta & Marius Jurgilas & Alain Kabundi, 2009. "The Effect Of Monetary Policy On Real House Price Growth In South Africa: A Factor Augmented Vector Autoregression (Favar) Approach," Working Papers, University of Pretoria, Department of Economics 200905, University of Pretoria, Department of Economics.
  4. Simplice A. Asongu, 2013. "African Stock Market Performance Dynamics: A Multidimensional Convergence Assessment," Journal of African Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 14(3), pages 186-201, December.
  5. Asongu Simplice, 2012. "African Financial Development Dynamics: Big Time Convergence," Working Papers, African Governance and Development Institute. 12/003, African Governance and Development Institute..
  6. Reginaldo Pinto Nogueira, 2009. "Is monetary policy really neutral in the long-run? Evidence for some emerging and developed economies," Economics Bulletin, AccessEcon, vol. 29(3), pages 2432-2437.
  7. Hayo, Bernd, 1998. "Money-output Granger causality revisited: An empirical analysis of EU countries," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 08-1998, ZEI - Center for European Integration Studies, University of Bonn.
  8. Agenor, Pierre-Richard & McDermott, C. John & Ucer, Murat, 1997. "Fiscal imbalances, capital inflows, and the real exchange rate: The case of Turkey," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 819-825, April.
  9. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, Elsevier, vol. 115(1), pages 53-74, July.
  10. Asongu Simplice, 2012. "Are Proposed African Monetary Unions Optimal Currency Areas? Real and Monetary Policy Convergence Analysis," Working Papers, African Governance and Development Institute. 12/005, African Governance and Development Institute..
  11. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 1-24, May.
  12. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0346, Faculty of Economics, University of Cambridge.
  13. David Fielding & Anja Shortland, 2005. "Political Violence and Excess Liquidity in Egypt," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 41(4), pages 542-557.
  14. Maddala, G S & Wu, Shaowen, 1999. " A Comparative Study of Unit Root Tests with Panel Data and a New Simple Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 61(0), pages 631-52, Special I.
  15. Asongu Simplice, 2012. "Fighting consumer price inflation in Africa. What do dynamics in money, credit, efficiency and size tell us?," Working Papers, African Governance and Development Institute. 12/011, African Governance and Development Institute..
  16. Simplice A., Simplice, 2011. "Why do French civil-law countries have higher levels of financial efficiency?," MPRA Paper 33950, University Library of Munich, Germany.
  17. Blinder, Alan S, 1987. "Credit Rationing and Effective Supply Failures," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 97(386), pages 327-52, June.
  18. Narayan Kishor & John Ssozi, 2010. "Inflation convergence and currency unions: the case of the East African community," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 3(1), pages 36-52, April.
  19. Asongu Simplice, 2013. "Correcting inflation with financial dynamic fundamentals: which adjustments matter in Africa?," Working Papers, African Governance and Development Institute. 13/003, African Governance and Development Institute..
  20. Rudi Dornbusch, 2001. "Fewer Monies, Better Monies," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 238-242, May.
  21. Lars E.O. Svensson & Stefan Gerlach, 2001. "Money and inflation in the Euro Area: A case for monetary indicators?," BIS Working Papers, Bank for International Settlements 98, Bank for International Settlements.
  22. Thomas Gries & Manfred Kraft & Daniel Meierrieks, 2008. "Linkages between Financial Deepening,Trade Openness and Economic Development: Causality Evidence from Sub-Saharan Africa," Working Papers CIE 15, University of Paderborn, CIE Center for International Economics.
  23. Harold Ngalawa & Nicola Viegi, 2011. "Dynamic Effects Of Monetary Policy Shocks In Malawi," South African Journal of Economics, Economic Society of South Africa, Economic Society of South Africa, vol. 79(3), pages 224-250, 09.
  24. Asongu Simplice, 2012. "How has Mobile Phone Penetration Stimulated Financial Development in Africa?," Working Papers, African Governance and Development Institute. 12/026, African Governance and Development Institute..
  25. Joakim Westerlund, 2007. "Testing for Error Correction in Panel Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 69(6), pages 709-748, December.
  26. Trecroci, Carmine & Vega, Juan Luis, 2000. "The information content of M3 for future inflation," Working Paper Series, European Central Bank 0033, European Central Bank.
  27. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 5(2), pages 139-64, Summer.
  28. Riccardo Cristadoro & Giovanni Veronese, 2011. "Policy Focus: Monetary policy in India: is something amiss?," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 4(2), pages 166-190, September.
  29. Hafer, R. W. & Kutan, Ali M., 2001. "Detrending and the money-output link: International evidence," ZEI Working Papers, ZEI - Center for European Integration Studies, University of Bonn B 19-2001, ZEI - Center for European Integration Studies, University of Bonn.
  30. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 90(1), pages 1-44, May.
  31. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  32. Bae, Sang-Kun & Jensen, Mark J. & Murdock, Scott G., 2005. "Long-run neutrality in a fractionally integrated model," Journal of Macroeconomics, Elsevier, Elsevier, vol. 27(2), pages 257-274, June.
  33. Pedroni, Peter, 1999. " Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 61(0), pages 653-70, Special I.
  34. Mishkin, Frederic S, 2002. "The Role of Output Stabilization in the Conduct of Monetary Policy," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 5(2), pages 213-27, Summer.
  35. Eric M. Leeper & Jennifer E. Roush, 2003. "Putting 'M' back in Monetary Policy," NBER Working Papers 9552, National Bureau of Economic Research, Inc.
  36. Mariam Camarero & Cecilio Tamarit, 2001. "A panel cointegration approach to the estimation of the peseta real exchange rate," Working Papers, Asociación Española de Economía y Finanzas Internacionales 01-08, Asociación Española de Economía y Finanzas Internacionales.
  37. Olivier Jeanne & Michael D. Bordo, 2002. "Monetary Policy and Asset Prices," IMF Working Papers, International Monetary Fund 02/225, International Monetary Fund.
  38. Olekalns, Nilss, 1996. "Some further evidence on the long-run neutrality of money," Economics Letters, Elsevier, Elsevier, vol. 50(3), pages 393-398, March.
  39. Bae, Sang-Kun & Ratti, Ronald A., 2000. "Long-run neutrality, high inflation, and bank insolvencies in Argentina and Brazil," Journal of Monetary Economics, Elsevier, Elsevier, vol. 46(3), pages 581-604, December.
  40. Simplice A, Asongu, 2012. "Are Proposed African Monetary Unions Optimal Currency Areas? Real, Monetary and Fiscal Policy Convergence Analysis," MPRA Paper 41552, University Library of Munich, Germany.
  41. Simplice A Asongu, 2013. "A Short-run Schumpeterian Trip to Embryonic African Monetary Zones," Economics Bulletin, AccessEcon, vol. 33(1), pages 859-873.
  42. Starr, Martha A., 2005. "Does money matter in the CIS? Effects of monetary policy on output and prices," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 441-461, September.
  43. Venus Khim-Sen Liew, 2004. "Which Lag Length Selection Criteria Should We Employ?," Economics Bulletin, AccessEcon, vol. 3(33), pages 1-9.
  44. Moosa, Imad A., 1997. "Testing the long-run neutrality of money in a developing economy: the case of India," Journal of Development Economics, Elsevier, Elsevier, vol. 53(1), pages 139-155, June.
  45. Serletis, Apostolos & Koustas, Zisimos, 1998. "International Evidence on the Neutrality of Money," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 30(1), pages 1-25, February.
  46. Tony Cavoli & Ramkishen S. Rajan, 2008. "Policy Focus: Open economy inflation targeting arrangements and monetary policy rules: Application to India," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 1(2), pages 237-251, December.
  47. E. Murat Ucer & C. John McDermott & Pierre-Richard Agénor, 1997. "Fiscal Imbalances, Capital Inflows, and the Real Exchange Rate," IMF Working Papers, International Monetary Fund 97/1, International Monetary Fund.
  48. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, Econometric Society, vol. 55(2), pages 251-76, March.
  49. Agenor, Pierre-Richard & McDermott, C John & Prasad, Eswar S, 2000. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," World Bank Economic Review, World Bank Group, World Bank Group, vol. 14(2), pages 251-85, May.
  50. Paul Levine, 2012. "Policy focus: Monetary policy in an uncertain world: probability models and the design of robust monetary rules," Indian Growth and Development Review, Emerald Group Publishing, Emerald Group Publishing, vol. 5(1), pages 70-88, April.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:agd:wpaper:13/005. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Asongu Simplice).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.