Magister Economicae - MEcon / The transmission mechanism of monetary policy has generated a substantial amount of interest in economic research in many countries, with most studies focusing on how a change in monetary policy stance, usually defined as an exogenous shock in a short-term interest rate, affects the economy at a national level, with changes in output, inflation and exchange rates being the key variables under investigation. This study adopts a similar analysis, with the general objective of examining the effectiveness of monetary policy in Botswana. Specifically, this study aims at finding out how the central bank rate affects inflation in Botswana and the duration of its effects on economic variables in Botswana. The study adopts the recursive VAR methodology, using quarterly data from 1995 quarter one to 2009 quarter four. The results show that monetary policy is most effective via the interest rate channel in Botswana, followed by the credit channel and then the exchange rate channel. In addition, the results reflect that the economy reacts to monetary policy actions with a one period lag, with the effect lasting for seven quarters.

i A bstr a ct T he t hesis ai ms t o s he d li g ht o n t he E ur o p e a n Ce ntr al B a n k s c o m m u nic ati o n i n or der t o i de ntif y its m ai n c o m p o ne nts b e ari n g i nf or m ati o n a b o ut f ut ure c h a n ges i n t he p olic y r ate. For t he a n al ysis, t he st u d y i ntr o d uces a m o di fic ati o n of a wi del y use d a p pr o ac h b ase d o n t he disse nt e x presse d i n pre vi o us m o net ar y p olic y v ote. Si nce t he E ur o p e a n Ce ntr al B a n k d o es n ot p u blis h t he v ote's det ails t he c o m m u nic ati o n of t he ce ntr al b a n k is use d as a pr o x y. Res ults n ot o nl y c o n fir m t he pre dicti ve p o wer of t he c o m m u nic ati o n b ut f urt her m ore i n dic ate t h at t he fi n a nci al m ar kets d o n ot f ull y i nc or p or ate t he i nf or m ati o n c o nt ai ne d. A det aile d a n al ysis s h o ws t he rele va nce of t he ti mi n g, deli ver y a n d c o nte nt of t he c o m m u nic ati o n. T he st u d y t heref ore pr o vi des a s u m m ar y of t he i m p ort a nt f act ors of t he E ur o p e a n Ce ntr al B a n k b o ar d me m b ers st ate me nts f or pre dicti n g f ut ure m o net ar y p olic y.

Please read the abstract in the section 00front of this document / Thesis (DCom (Economics))--University of Pretoria, 2006. / Economics / unrestricted

The credit channel and its significance in the monetary policy transmission mechanism has been a point of contention among policy makers and economists for many years. In the early stages of this debate the monetarist view shaped thinking on the topic and cultivated the belief that the money supply is exogenously determined and that commercial banks playa minor role in the monetary transmission process. However, over the years, the credit view presented by Bernanke and Blinder (1988) has gained momentum. In contrast to the monetarist view, the credit view abandons the assumption of perfect substitutability and argues that due to their credit provision activities, financial institutions playa significant role in the transmission of monetary policy. The credit channel consists of two sub channels, the bank lending and balance sheet channels. In both, deposits drive loans and changes in monetary policy are effected through interest rates and their impact on borrowers' balance sheets, bank reserves, bank deposits and ultimately the quantity of bank loans supplied. Disyatat (2010) re-examines the conventional view and presents an argument against the foundation upon which the theories are based. Using this as a basis, and motivated by the vast amount of empirical literature that already exists on this topic, both in South Africa and abroad, this research provides a theoretical analysis of the credit channel and its relative importance in the monetary policy transmission mechanism. The exogenous/endogenous nature of money supply is considered and its implications for the existence and operation of the credit channel set out. It is found that, in order for a credit channel to operate efficiently in an economy, money supply should be endogenously determined. Moreover, a theoretical argument supporting Disyatat's (2010) revised credit channel is presented; it is concluded that, with a slight variation to Disyatat's proposed model, a single, unified channel exists.

Please read the abstract in the section 00front of this document / Thesis (DCom (Economics))--University of Pretoria, 2006. / Economics / unrestricted

This study sought to empirically investigate the impact of monetary policy on the economic growth in Uganda during the period 1985-2013. The variables analysed were real gross domestic product, real interest rates, real effective exchange rates and inflation. The empirical analysis used a Vector Autoregressive (VAR) model as well as other techniques in order to obtain meaningful results. Using the Johansen technique, the empirical findings revealed that all the variables share a long run relationship. Further, real interest rates, real effective exchange rates and inflation have a negative effect on economic growth in the long run. The results further revealed that in a ten-year period, the variations in real GDP can be explained by its own innovations followed by real interest rates but real effective exchange rates and inflation however have minimal effects on real GDP. The findings of the impulse response test reiterated the VECM results showing that real interest rates and real effective exchange rate have a negative impact on economic growth in the first three years and the effect dies out after the fifth year. On the other hand, inflation rate has a marginal positive effect on economic growth in the first three years after which the effect becomes negative and wanes off after the sixth year. Uganda uses an Inflation Targeting Lite monetary framework that is based mainly on the use of interest rates to curb inflation. However, this study revealed that the use of interest rates as a policy tool to combat inflation results in a negative bearing on growth. It is on these grounds that this dissertation recommends a gradual policy shift from exclusive use of inflation targeting. Policy makers should thus consider using exchange rate targeting. Mishkin (2013) states that having a credible exchange rate target helps a country to anchor inflation to the expectations of the inflation rate in the economy because it ties the inflation rate of internationally traded goods to those of the country. This would be beneficial to Uganda which is a land locked country that relies heavily on imported products especially petroleum products and fuel whose prices fluctuate from time to time. In addition, exchange rate targeting is effective in reducing inflation quickly especially in emerging economies like Uganda. However, policy makers should be mindful that using exchange rate targeting can make a country prone to speculative attacks on their currencies which could devalue a country’s currency thus leading to a decline in economic growth. It is prudent therefore to apply these policies with a degree of caution.

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In the first chapter “Impact of Quantitative Easing at the Zero Lower Bound (with J. Dorich, R. Mendes)”, we introduce imperfect asset substitution and segmented asset markets, along the lines of Andres et al. (2004), in an otherwise standard small open-economy model with nominal rigidities. We estimate the model using Canadian data. We use the model to provide a quantitative assessment of the macroeconomic impact of quantitative easing (QE) when the policy rate is at its effective lower bound. In the second chapter “Impact of Forward Guidance at the Zero Lower Bound”, I consider alternative monetary policy rules under commitment in a calibrated three-equation New Keynesian model and examine the extent to which forward guidance helps to mitigate the negative real impact of the zero lower bound. The simulation results suggest that the conditional statement policy prolongs the zero lower bound duration for an additional 4 quarters and reverses half of the decline in inflation associated with the lower bound. It even generates a period of overshooting in inflation three quarters after the initial negative demand shock. Alternatively, the effect of price-level targeting as a forward guidance policy at the zero lower bound is slightly different. In the third chapter “Impact of Quantitative Easing on Household Deleveraging”, I extend the DSGE model in the first chapter with some financial frictions to explore the effects of QE on asset prices and household balance sheet. There are two effects of QE on aggregate output originated from the model. First, QE leads to a decline in term premium, which increases current consumption relative to future consumption. Second, it leads to a lower loan to collateral value ratio and a decline in external finance premium. Favorable financing condition encourages further accumulation of household debt at cheaper rates, in turn, leads to an immediate higher household debt to income ratio. In the consideration of the future withdrawal of any stimulus provided from QE, this would pose greater challenges as it implies much intensive household deleveraging process. I provide some sensitivity analysis around key parameters of the model.

The three chapters of this thesis address two questions. First, how are real and nominal exchange rates between different national currencies determined? Second, how does this determination influ- ence the international transmission of macroeconomic fluctuations and, especially, monetary policy disturbances? Chapter 1 comprises an empirical evaluation of long-run purchasing power parity as a theory of equilibrium nominal exchange rate determination for the post-Bretton Woods data. Structural time series methods are used to identify bivariate moving average representations of nominal exchange rates and relative goods prices and to test whether these empirical representations are consistent with the implications of purchasing power parity. Long-run purchasing power parity can be un ambiguously rejected for the G- 7 countries. There are permanent deviations from parity which account for almost all of the variance of real exchange rates, and which are driven by permanent disturbances to nominal rates which are never reflected in relative goods prices. Chapter 2 presents an empirical evaluation of the hypothesis that the global Depression of the 1930’s was attributable to international transmission of (idiosyncratic) U.S. monetary policy actions through the International Gold Exchange Standard - fixed exchange rate - regime. Specifically, the analysis evaluates whether the interwar output collapse in Canada was caused by transmitted U.S. monetary policy disturbances. A multivariate structural time series representation of the Cana dian macroeconomy is estimated which is consistent with the dynamic and long-run equilibrium properties of a Mundell- Fleming small open economy model and in which U.S. data represent the ‘rest of the world’. The empirical results show that U.S. monetary disturbances play a negligible role for both Canadian and U.S. output movements in the 1930’s. Permanent common real shocks to outputs can account for the onset, depth and duration of the Depression in both economies. There is little evidence to support a Gold-Standard transmitted global output collapse through the transmission mechanisms usually associated with purchasing power parity theories of real exchange rate determination. Chapter 3 develops an alternative theory of real and nominal exchange rate determination and of the international transmision mechanism which can account for many stylized facts regarding the empirical behaviour of real and nominal exchange rates that long-run purchasing power parity fails to explain. In a two-country, two-currency overlapping generations model, the role of optimal portfolio choices between internationally traded assets is emphasized - rather than goods market trade - as the source of currency demands. These demands, and supplied of assets generated by domestic monetary policies, determine both real and nominal exchange rates. Here, monetary policy changes can induce permanent international and intra-national reallocations through real exchange rate and real interest rate adjustments. This transmission mechanism differs markedly from that implied by purchasing power parity. / Business, Sauder School of / Graduate

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