As a post-conflict and fragile state, Sierra Leone has witnessed increased liberalization and greater openness since the end of the civil unrest in 2002. This high degree of openness appears to be negatively affecting the country’s balance of payments, with a substantial amount of foreign exchange earnings being spent annually the importation of essential commodities. Theoretically, openness may significantly contribute to weakening the effect of monetary policy on both output growth and exchange rate, but strengthens the effect on inflation. This study examines the implication of openness for the effectiveness of monetary policy in Sierra Leone. The autoregressive distributed lag technique was employed for quarterly data from the period 2002 to 2018. The results show that a higher degree of openness weakens the effect of monetary policy on both output growth and exchange rate, but strengthens the effect on inflation. The implication for policy is that, authorities should take into consideration the consequences of openness on the optimal monetary policy choice when taking monetary policy decisions.

This study examined the transmission channel of monetary policy to real economy in Sierra Leone using quarterly data from 2002 to 2018. The non-recursive structural vector autoregressive technique was employed to identify the channel of monetary policy transmission to the real economy. This technique was considered appropriate because it has two-way or bidirectional causal effects among endogenous variables and ordering of endogenous variables are considered flexible. Analysis of data shows that the exchange rate channel was found to be appropriate in transmitting monetary policy effect to real economy based on the results of impulse response and variance decomposition analysis. In light of the empirical findings, the study recommended that in a bid to have an effective monetary policy, the channels of monetary policy transmission, especially the exchange rate channel, should be taken into consideration in the design of monetary policy in Sierra Leone.