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

60 Pages Posted: 22 Feb 2013

See all articles by Hamid R. Davoodi

Hamid R. Davoodi

International Monetary Fund (IMF) - Fiscal Affairs Department

Shiv Dixit

Indian School of Business

Gabor Pinter

Bank of England

Date Written: February 2013

Abstract

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.

Keywords: Discount rates, East Africa, Economic models, Interest rate policy, Monetary policy, Monetary transmission mechanism, Reserves, aggregate demand, aggregate demand effects, central bank, contractionary monetary policy, demand for money, discount rate, expansionary monetary policy, income velocity of money, inflation, inflation-targeting, liquidity management, long-term interest rates, monetary aggregate, monetary aggregates, monetary authorities, monetary base, monetary determinants, monetary economics, monetary frameworks, monetary fund, monetary policies, monetary policy, monetary policy framework, monetary policy frameworks, monetary policy implementation, monetary policy instrument, monet

JEL Classification: E31, E44, E42, E51, E52

Suggested Citation

Davoodi, Hamid R. and Dixit, Shiv and Pinter, Gabor, Monetary Transmission Mechanism in the East African Community: An Empirical Investigation (February 2013). Available at SSRN: https://ssrn.com/abstract=2222503 or http://dx.doi.org/10.2139/ssrn.2222503

Hamid R. Davoodi (Contact Author)

International Monetary Fund (IMF) - Fiscal Affairs Department ( email )

700 19th Street, NW
Washington, DC 20431
United States

Shiv Dixit

Indian School of Business ( email )

Sector 81
Mohali, 143006
India

HOME PAGE: http://shivdixit.com

Gabor Pinter

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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