A Bayesian estimation of monetary policy effects on macroeconomic dynamics in Sierra Leone: A new Keynesian DSGE approach

This paper conducts a Bayesian assessment of a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model in the context of Sierra Leone's economy by l utilising quarterly data from 2011 to 2022. It examines how monetary policy, demand shocks, and cost-push shocks affect selected macroeconomic variables, including production, inflation, and the policy interest rate. The analysis highlights the crucial role of monetary policy in managing demand-induced inflation; however, it is comparatively less successful in mitigating inflation resulting from cost-push shocks, such as commodity price volatility. The research found that demand shocks result in a temporary rise in output and inflation, followed by policy tightening. Conversely, cost-push shocks induce persistent inflationary pressures, pushing the economy into recession, characterised by declines in output. The results highlight the importance of macroeconomic policy coordination that amalgamates effective monetary policies with structural changes, particularly given Sierra Leone's vulnerability to exogenous shocks. This paper enhances the comprehension of DSGE models relevant to low-income countries, providing the Bank of Sierra Leone and similar institutions with significant insights into complex economic dynamics. Policy recommendations include enhancing fiscal-monetary coordination, investing in supply-side diversification, and strengthening institutional credibility to build resilience against macroeconomic shocks.