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Revisiting interest rate and lending channels of monetary policy transmission in the light of theoretical prescriptions

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  • Abdul-Aziz Iddrisu
  • Imhotep Paul Alagidede

Abstract

Although theories on channels of monetary policy transmission emphasize indirect monetary policy effect on inflation and output, empirical literature is surprisingly rooted in a direct approach. The use of variants of vector autoregression, with theoretical ordering of variables, does not only fail to quantify the indirect effect, but are also fraught with disagreements on identification of shocks of monetary policy. We revisit the interest rate and lending channels of monetary policy transmission in an approach that is grounded in theory and elicits step-by-step transmission of monetary policy impulses and the eventual effect on inflation in South Africa. We find interest rate and lending channels to be operative in South Africa. For the interest rate channel, a percentage restriction in monetary policy increases lending rate by 0.29%; a percentage increase in the lending rate reduces investment by 0.063%; and a percentage fall in investment reduces inflation by 0.074%. For the lending channel, a percentage restriction of monetary policy reduces banking sector credit by 0.22%; a percentage fall in private sector credit reduces investment by 0.20%; and a percentage decline in investment reduces inflation by 0.086%. These results are robust to different samples and specifications.

Suggested Citation

  • Abdul-Aziz Iddrisu & Imhotep Paul Alagidede, 2020. "Revisiting interest rate and lending channels of monetary policy transmission in the light of theoretical prescriptions," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 20(4), pages 183-192.
    • Handle: RePEc:tcb:cebare:v:20:y:2020:i:4:p:183-192
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    Cited by:

    1. Ibrahim Ayoade Adekunle & Sheriffdeen Adewale Tella & Oluwaseyi Adedayo Adelowokan, 2021. "Macroeconomic policy volatility and household consumption in Africa," SN Business & Economics, Springer, vol. 1(3), pages 1-22, March.
    2. Inda Mulaahmetović, 2022. "Quantitative Easing and Macroeconomic Performance in the United States," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 11(3), pages 79-98.
    3. Pargaru Ion & Gombos Carol Cristina & Spiridon Carmen & Buzoianu Ovidiu Andrei Cristian, 2022. "Evolutions and trends regarding the monetary and fiscal-budgetary policy in Romania," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 16(1), pages 381-389, August.
    4. Petrovska Magdalena & Tonovska Jasna & Nikolov Miso & Sulejmani Artan, 2022. "Evaluating Monetary Policy Effectiveness in North Macedonia: Evidence from a Bayesian Favar Framework," South East European Journal of Economics and Business, Sciendo, vol. 17(2), pages 67-82, December.

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