The transmission mechanism of monetary policy in Botswana
Macroeconomic stability is one of the most important national objectives in anycountry. However, economies are often subjected to a number of shocks(internal and external), which can be destabilising, produce volatility and make itdifficult to achieve and maintain economic stability. Consequently, variouspolicies are used to help deal with the various shocks that may affect theeconomy. Of all the available policies, monetary policy appears to have beenever more at the centre of macroeconomic policymaking. Meanwhile, formonetary policy to be effective, there is a need for a better understanding of thetransmission mechanism, i.e., the process through which monetary policydecisions are transmitted into changes in real output and inflation.Whereas extensive research on the transmission mechanism has been conductedin developed countries, such work in developing countries, especially in Africa islacking. This could be due to the fact that it was not long time ago, around the1990s that countries in Africa started adopting the more modem central bankoperations in a market-based economic and financial system characterised byindirect monetary policy. Such operations require an understanding of thetransmission mechanism. Lack of empirical analysis of the monetarytransmission mechanism in Botswana and developing countries of Africa ingeneral, is the main motivating factor behind this thesis. The main objective ofthis thesis is, therefore, to estimate the transmission mechanism of monetarypolicy in Botswana. Three different, but complementary techniques (theNarrative Approach, Vector Autoregression (VAR) analysis and the StructuralApproach involving the estimation of a small structural model for Botswanaeconomy) are used. Results from these methods tell a consistent story andindicate that monetary policy in Botswana affects real output and inflationthrough the interest rate channel, while the exchange rate channel is notoperational. The credit channel is also active but not strong. The structuralapproach also indicates that devaluation is contractionary in Botswana, but moreresearch is necessary before firmer conclusions could be made.
Year of publication: |
2007
|
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Authors: | Kganetsano, Tshokologo A. |
Publisher: |
Tshokologo Alex Kganetsano |
Subject: | Botswana | Macroeconomic stability | Monetary policy | Transmission mechanism | Real output | Inflation | Narrative approach | Vector autoregression | Macroeconomic model | Shocks |
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