Monetary policy transmission mechanism: evidence from economic community of West African States
List of Authors
  • Abdullahi Salihu , Badayi M. Sani

Keyword
  • Monetary Policy Transmission Mechanism, Real Interest Rate Channel, Exchange Rate Channel, Credit Channel, Real GDP, and Panel Structural VAR

Abstract
  • Monetary policy is primarily concerned with the activities of the monetary authorities to control some measures of the money supply and/or structure of interest rates in the economy for the achievement of the macroeconomic objectives. Understanding the channels through which the monetary policy affects the economy will provide useful information for designing appropriate economic policies. The study, therefore, seeks to evaluate the effectiveness of monetary policy transmission mechanisms using panel structural VAR on the data of 10 Economic Community of West African States (ECOWAS) for the periods 2005Q1 to 2017Q4. The data was collected from the World Bank and the International Monetary Fund. The results from the panel unit root tests indicate that money supply is stationary at level, whereas real interest rate, exchange rate, bank credit, and real GDP are non-stationary at level but became stationary at first difference. Pedroni cointegration test result revealed that there is no long-run cointegration relationship between the variables. Furthermore, the estimated results of the impulse response functions and forecast error variance decompositions show that interest rate and credit channels are the main transmission mechanism of monetary policy among ECOWAS. The study, therefore, recommends that interest rate and bank credit channels should be strengthened to improve the effectiveness of the monetary policy.

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