Effectiveness of Monetary Policy Transmission Mechanism on Macroeconomic Objectives; A Case of Selected East African Countries (Pooled Mean Group Estimation)
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Date
2019-06
Authors
Yabatfenta, Getachew
Journal Title
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Publisher
Addis Ababa University
Abstract
This paper investigates the effectiveness of monetary policy transmission mechanism on
macroeconomic objectives in cases of selected East African Countries using a Dynamic Panel
ARDL model with Pooled Mean Group estimation method. It specifically examines the dynamic
responses of exchange rate, real interest rate, domestic credit and broad money supply on
economic growth rate, consumer price index and balance of payment by employing annual data
from 1992 to 2017. To do so, three models (economic growth rate, consumer price index and
balance of payment) and different tests (i.e. descriptive analysis, panel unit root test, Pedroni co
integration test and pooled mean group estimation) were used. The empirical evidence for
economic growth rate model suggests that exchange rate, real interest rate and broad money
supply have a positive and significant long-run impact for economic growth rate, while domestic
credit has a negative and significant impact for economic growth rate in both short-run and long
run. Exchange rate and broad money supply have no significant impact for economic growth in
the short run but real interest rate has positive and significant impact in the short run. Similarly,
empirical result for consumer price index model shows that exchange rate and real interest rate
have a significant and negative long-run impact for consumer price index whereas domestic
credit and broad money supply have a significant and positive long-run impact for consumer
price index. The short-run analysis suggests that real interest rate, domestic credit and broad
money supply have a negative short-run impact for consumer price index while exchange rate
has a positive and insignificant short-run impact. For balance of payment model, exchange rate
and domestic credit have positive insignificant short run and significant long-run impact for
balance of payment. However, real interest rate and broad money supply have negative short run
and long-run impact for the balance of payment with insignificant impact of real interest rate
both in short run and long run. Therefore, real interest rate and broad money supply have no
significant impact for balance of payment in selected east African countries. The monetary
authorities and policy makers should know the relationship between monetary policy
transmission mechanisms and macroeconomic objectives with their central bank monetary
policy.
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Keywords
Macroeconomic Objectives, Monetary Policy Transmission Mechanism, Panel ARDL, Selected East African Countries