Monetary Policy Transmission and Targeting Mechanisms in the MENA Region

Since the early 1990s some industrialized economies have implemented a monetary policy regime shift known as inflation targeting. This shift was justified by the difficulties posed by targeting the nominal exchange rate, or in some instances money supply. Given the very encouraging experience of developed countries, a number of MENA countries decided to adopt price stability as an explicit monetary policy objective. Using sophisticated time series econometric techniques, this study aims to highlight the monetary transmission mechanism across the region, and to assess how successful the MENA countries have been in making a smooth transition to inflation targeting. The empirical results indicate that the recent success of Turkey and Egypt in adopting flexible exchange rates has helped those countries shift to an inflation targeting regime. It is also shown that Jordan, Lebanon, Morocco and Tunisia will have to introduce more flexibility into their exchange rates before they can shift to an inflation targeting monetary policy regime. Other empirical results indicate that for Egypt and Turkey, the exchange rate played a dominant role in the transmission mechanism of monetary policy, while for Jordan, Lebanon, Morocco, and Tunisia it was the interest rate that played the dominant role.