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Monetary Policy Shocks from the EU and US: Implications for Sub-Saharan Africa

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  • Kronick, Jeremy

Abstract

This paper addresses the debate in the literature on how developing countries are affected by foreign monetary policy shocks. I analyze how contractionary monetary policy shocks originating in different regions, specifically the Euro Area (“EU”) and United States (“US”), affect a set of rarely investigated sub-Saharan African (“SSA”) countries. Foreign monetary policy shocks are identified using changes in central bank futures rates, and are inserted into a domestic structural vector autoregression (“SVAR”). Results differ depending on which of the EU or US shocks monetary policy and whether or not the recipient SSA country has a floating or fixed exchange rate regime. Specifically, floating exchange rate countries have a mostly negative GDP response following either shock due to a reliance on capital flows and external debt, and the implications these have for domestic interest rate responses. Fixed exchange rate countries have mixed GDP responses following the EU shock, as both trade and the effect of capital control usage on interest rates play an important role, while US shocks produce positive GDP responses as aid from the US dominates both trade and interest rates. The implications of these results for floating exchange rate countries is that diversification of foreign external debt and a reduction in reliance on international capital may be beneficial. For fixed exchange rate countries the implication is that capital controls can be a positive tool in the development process.

Suggested Citation

  • Kronick, Jeremy, 2014. "Monetary Policy Shocks from the EU and US: Implications for Sub-Saharan Africa," MPRA Paper 59416, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:59416
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    Keywords

    Monetary policy; international transmission of shocks; economic growth; sub-Saharan Africa;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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