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Monetary Transmission Mechanism in the East African Community: An Empirical Investigation

  • Hamid Reza Davoodi
  • S. V. S. Dixit
  • Gabor Pinter

Do changes in monetary policy affect inflation and output in the East African Community (EAC)? We find that (i) Monetary Transmission Mechanism (MTM) tends to be generally weak when using standard statistical inferences, but somewhat strong when using non-standard inference methods; (ii) when MTM is present, the precise transmission channels and their importance differ across countries; and (iii) reserve money and the policy rate, two frequently used instruments of monetary policy, sometimes move in directions that exert offsetting expansionary and contractionary effects on inflation—posing challenges to harmonization of monetary policies across the EAC and transition to a future East African Monetary Union. The paper offers some suggestions for strengthening the MTM in the EAC.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/39.

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Length: 59
Date of creation: 06 Feb 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/39
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  1. Prachi Mishra & Peter Montiel, 2012. "How Effective is Monetary Transmission in Low-Income Countries? A Survey of the Empirical Evidence," IMF Working Papers 12/143, International Monetary Fund.
  2. Christiano, Lawrence J. & Trabandt, Mathias & Walentin, Karl, 2010. "DSGE Models for Monetary Policy Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 7, pages 285-367 Elsevier.
  3. Luis-Felipe Zanna & Andrew Berg & Tokhir Mirzoev & Rafael Portillo, 2010. "The Short-Run Macroeconomics of Aid Inflows; Understanding the Interaction of Fiscal and Reserve Policy," IMF Working Papers 10/65, International Monetary Fund.
  4. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  5. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  6. Aüssi Sayinzoga & Richard Simson, 2006. "Monetary Policy In Rwanda: A Cointegration Analysis," South African Journal of Economics, Economic Society of South Africa, vol. 74(1), pages 65-78, 03.
  7. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 2005. "The Generalized Dynamic Factor Model: One-Sided Estimation and Forecasting," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 830-840, September.
  8. Régis Barnichon & Shanaka J. Peiris, 2008. "Sources of Inflation in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(5), pages 729-746, November.
  9. Koop, Gary & Korobilis, Dimitris, 2010. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Foundations and Trends(R) in Econometrics, now publishers, vol. 3(4), pages 267-358, July.
  10. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," SSE/EFI Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
  11. Christopher A. Sims & Tao Zha, 1996. "Bayesian methods for dynamic multivariate models," Working Paper 96-13, Federal Reserve Bank of Atlanta.
  12. Alfredo Baldini & Marcos Poplawski-Ribeiro, 2011. "Fiscal and Monetary Determinants of Inflation in Low-Income Countries: Theory and Evidence from Sub-Saharan Africa-super- †," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 20(3), pages 419-462, June.
  13. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, vol. 58(1), pages 113-44, January.
  14. John B. Taylor, 1995. "The Monetary Transmission Mechanism: An Empirical Framework," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 11-26, Fall.
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