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Monetary Policy in Sub-Saharan Africa$
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Andrew Berg and Rafael Portillo

Print publication date: 2018

Print ISBN-13: 9780198785811

Published to Oxford Scholarship Online: April 2018

DOI: 10.1093/oso/9780198785811.001.0001

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Identifying the Monetary Transmission Mechanism in Sub-Saharan Africa

Identifying the Monetary Transmission Mechanism in Sub-Saharan Africa

(p.112) Chapter 6 Identifying the Monetary Transmission Mechanism in Sub-Saharan Africa
Monetary Policy in Sub-Saharan Africa

Bin Grace Li

Christopher Adam

Andrew Berg

Peter Montiel

Stephen O’Connell

Oxford University Press

VAR methods suggest that the monetary transmission mechanism may be weak and unreliable in low-income countries. But are structural VARs identified via short-run restrictions capable of detecting a transmission mechanism where one exists, under research conditions typical of these countries? Using small DSGEs as data-generating processes, the chapter assesses the impact on VAR-based inference of short data samples, measurement error, high-frequency supply shocks, and other features of the LIC environment. The impact of these features on finite-sample bias appears to be relatively modest when identification is valid—a strong caveat, especially in low-income countries. However, many of these features undermine the precision of estimated impulse responses to monetary policy shocks, and cumulatively they suggest that ‘insignificant’ results can be expected even when the underlying transmission mechanism is strong.

Keywords:   Monetary transmission mechanism, monetary policy, low-income countries, developing countries, vector autoregression (VAR) methods, Monte Carlo methods

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