Monetary Transmission Mechanism in the East African Community: An Empirical Investigation
60 Pages Posted: 22 Feb 2013
Date Written: February 2013
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: Suggested Citation