Monetary policy dynamics and economic growth in Sub-Saharan Africa : an empirical investigation

Abstract

The broad idea behind this dissertation is to undertake an empirical investigation into the nexus between monetary policy dynamics vis-a-vis growth in Sub-Saharan African countries. Basically, the study empirically seeks to provide answers to four major questions, namely: (i) monetary policy dynamics on growth in SSACs? (iii) What are the dynamic interactions between monetary policy variables and growth and (iv) To what extent do the identified external factors of oil and commodity price volatilities influence monetary policy dynamics in SSACs? Due to data collection constraints, 36 countries within the four major economic blocs of EAC, CEMAC, ECOWAS and SADC were selected covering a period from 1980-2015 thereby making the residuals both time series and cross sectional in nature. The overall variables of interest as identified in the literature are gross domestic product growth rate, money supply growth rate, exchange rate, inflation rate, interest rate, government expenditures, net domestic credit, oil and commodity price volatilities, and a dummy variable for the global financial crisis. The starting point in the estimation of the models is the use of Exponential Generalized Auto-regressive Conditional Heteroskedaticity (EGARCH) to examine the asymmetric effects of oil and commodity price volatilities on the economic growth of SSA. Relevant econometric tests such as tests for the stationarity of variables (unit root tests), long run relationship test (test for cointegration), Wald tests and Lag selection criteria were performed in order to avoid the problems of spurious regression and unreliable results. Basically, the study used panel data regressions and the panel results revealed the presence of cross sectional dependence which necessitated the breaking down of the analyses into individual economic blocs of CEMAC, EAC, ECOW AS and SADC. In order to capture the first objective of the study, the Panel-ARDL approach of cointegration analysis, which most satisfies the outcomes of the unit root tests was employed. The fixed and random effects models supported by dynamic panel model formed the basis of the analysis for objective two. An eightvariable Structural-VAR was employed to generate Impulse Response Functions and Variance Decompositions for the analysis of objectives three and four of the study. Under the first objective, the GDP, which represents output, was confirmed as an important determinant of monetary policy dynamics across the four economic blocs, even though, this was more grounded in SADC and CEMAC where financial deepening is very effective. The second variable investigated, which is money supply growth rate (financial deepening), is found to have a significant impact on monetary policy dynamics in SSA but the effect is more pronounced in SADC, EAC and CEMAC. The findings further underscore the effect of financial deepening or effective money supply in monetary policy effectiveness in SSA. The next variable, which is exchange rate, was confirmed from the results as an important factor that affects monetary policy dynamics across the four economic blocs in SSA. Although it plays different roles across the economic blocs, the impact has generally been shown to be significant on monetary policy dynamics in SSA. Unlike other variables however, inflation did not display an overwhelming influence as an important variable affecting monetary policy dynamics in SSA as a whole. In spite of this, its effect was found significant in the two largest economic blocs of ECOW AS and SADC. However, government expenditure, net domestic credit and gross capital formation fail to exhibit a noticeable impact as determinants on monetary policy dynamics across all four economic unions in SSA. The result of the impact of monetary policy variables on the economic growth of SSA shows that the dynamics in monetary policy during the period under review have a significant impact on the economic growth of SSA but this varies from one economic bloc to another. For instance, exchange rate shows a more diverse result as it reveals that its impact is more pronounced in ECOW AS than the other three blocs. The influence of other macroeconomic variables such as inflation rate accounted for significant changes in the economic outlook of SSA with their attendant effects on the relationship between monetary policy and economic growth as well. The results of the dynamic interactions between monetary policy variables and economic growth of SSA show that monetary policy dynamics is greatly influenced by the external shocks from both oil and commodity price volatilities and the transmission mechanism channels indicate that this is passed through the monetary policy rate to exchange rate, and from exchange rate to GDP growth rate in CEMAC. As for the other economic blocs, the medium of transmission is through exchange rate to monetary policy rate and finally to GDP growth rate. Consequently, the medium of transmission of external shocks to the domestic economies in SSA is exchange rate for ECOW AS, SADC and EAC but in CEMAC, monetary policy rate is the medium of transmission. In summary, expansion of the economic base of the region, increase in domestic output, policy harmonization, import restrictions and improved infrastructural facilities coupled with increased agricultural productivities are some of the proffered policy recommendations for the SSACs.