Monetary Policy, External Shocks and Economic Growth Dynamics in East Africa: An S-VAR Model

Abstract

Resulting from the incessant political and economic uncertainty that bedevils the EAC region in the recent past, the various governments have used monetary policy changes in response to shocks from macroeconomic variables. However, the available literature shows a non-agreement by scholars as far as the dynamics in monetary policy, external shocks and macroeconomic activity connections are concerned, for both country-by-country analyses and regional assessments. This article widens the frontiers of knowledge about how the dynamics of monetary policy, external shocks and macroeconomic performance interact within the EAC economic region. We adopted the S-VAR method because of its contemporary nature as far as a transmission of monetary policy approach is concerned. The interconnectivity among the countries of EAC is an indication that any shock to the price of commodities (non-oil commodities) has significant implication on the exchange rate, which will be channelled through the supply of money and monetary policy to the GDP. The need to diversify the productive and export base of member countries, compared to the continuous dependence on one or a few products as the major source of income, is hereby advocated.

West African Monetary Policy, External Shocks and Economic Growth Dynamics: An S-Var Model

“…The result of the structured VAR and descriptive analysis by Chuku and Simpasa (2018) revealed a heterogeneous relationship between commodity product shocks and economic activities of the countries under investigation, while shedding more light on the nexus between commodity price fluctuations in some commodity-dependent African countries. The work by Olamide et al (2022) in Nigeria, which used the S-VAR estimate technique, was in line with this. The study found that oil price shocks had a large and negative impact on output and growth.…”

“…The existing association balance of payment (BOP), growth rate of gross domestic product (GDP GR), supply of money and inflationary rate were also explained contemporaneously in coefficients 𝑏 53 0 , 𝑏 54 0 and 𝑏 56 0 . The assumption that inflation responded contemporaneously to shocks in output adhered to the studies by (Olamide et al, 2022). The instantaneous response to oil and commodity prices, exchange rates and the rate of inflation by supply of money was explained in the sixth equation.…”

“…A systematic adjustment by monetary policy to deviations in fiscal policy from sustainable long-run economic development was postulated in a research by (Ng'ang'a et al, 2019) on the implications of monetary and fiscal policies on GDP. In another study on the relative effectiveness of both strategies in Ethiopia, Olamide et al (2022) found that monetary policy is more potent on economic growth than fiscal policy. This was in contrast to Moller and Wacker (2017), who found that in Ethiopia, fiscal policy has a greater impact on growth than monetary policy.…”

Economic prosperity, asymmetric natural resource income, and ecological demands in resource-reliant economies

“…Recently, Wen et al (2022) adopted the cross-sectional augmented ARDL (CS-ARDL) and the AMG methods to conclude that volatility in resource rents promotes long-term economic growth in BRICS countries. By adopting a structural vector autoregressive (S-VAR) model, Olamide et al (2022) reported that the economic dependence between East African countries implies that shocks to commodity prices will significantly and positively affect their economies. Zhang et al (2022) showed by using the fully modified OLS (FMOLS), DOLS, and canonical cointegrating regression (CCR), that natural resources volatility adversely and critically impacted global economic growth.…”

Poverty, Insecurity, and Climate Change Stare at the EU-AU Relations

“…The eight-week-long lockdowns implemented in 32 African countries prohibited all forms of social gatherings or functions, including public transport operations, schools, workplaces and markets, from opening. The closure of businesses came with the most economic impact, considering the size of the informal market in sub-Saharan Africa and the fact that many households depend on a daily income system (Olamide et al, 2022;Teachout & Zipfel, 2020;Zvokuomba & Kabonga, 2021). The freezing of formal business activities greatly impacted even those who do not depend on the daily income system.…”