Monetary Policy Rules and Economic Shocks in the DSGE Models of Sub-Saharan Economies
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Date
2018-12
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Addis Ababa University
Abstract
The objective of the study is to explain the applicability of the monetary policy rule of the kind
widely used in the standard DSGE models to the DSGE models of SSA economies. It also attempted
to analyze the relative importance of the domestic and external source of economic shocks as well
as the impact of some selected shocks on macroeconomic variables of SSA economies using a
DSGE model. The results are the following: first, in response to the baseline structural shocks, the
monetary aggregate rule better explains SSA economies than the Taylor type interest rate rule. To
put differently, the simple Taylor interest rate rule needs modification to apply it in the DSGE
model of SSA economies. Second, the study shows that both internal and external economic shocks
are responsible for macroeconomic fluctuations in SSA countries, however, the study found that
external economic shocks are importance vis-à-vis the domestic economic shocks. Third, in most
economic shocks which are used by the study, price of imported goods and exchange rate
appreciation or depreciation are the major determinant of the inflation pressure in SSA economies.
Moreover, currency depreciation does not promote export, and domestic energy supply shock
creates higher inflation and demand in the economy. In this paper, it is recommended that in
modeling the monetary policy rules in macroeconomic models of sub-Saharan economies,
incorporating the monetary base instrument and external influence on the monetary management
of such economies is essential
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Keywords
DSGE, Economic Shocks, Monetary Policy, Sub-Saharan economies