This thesis investigated the role of monetary policy in Namibia for the period 1993 to 2011. It aims at achieving six objectives. First, it reviews the evolution of monetary policy in Namibia for the period 1980 to 2011. Second, it investigates the interest rate channel of the monetary policy transmission mechanism in Namibia. Third, it analyses the credit channel of the monetary policy transmission mechanism in Namibia. Fourth, it evaluates the exchange rate channel of the monetary policy transmission mechanism in Namibia. Fifth, it studies the money effect model in the context of the monetary policy transmission mechanism in Namibia. Sixth, it examines the exchange rate pass–through (ERPT) to domestic prices in Namibia. In order to achieve the objectives of the relative importance of the different channels of monetary policy transmission, a structural vector autoregressive model of the Namibian economy is constructed. Specifically the responses of the output and prices to monetary policy shocks for Namibia over the quarterly period 1993:Q1 to 2011:Q4 are investigated using impulse response functions and forecast variance error decompositions obtained from a structural vector autoregressive model (SVAR). The thesis also examined the exchange rate pass-through from exchange rate to domestic prices using both SVAR and the single equation error correction model (ECM). Estimation results on the different channels of monetary policy transmission mechanism showed that the interest rate channel and the credit channel are effective in transmitting monetary policy actions. The exchange rate channel is also operative but not effective. The money effect model confirms that inflation in Namibia is not a monetary phenomenon. The results of the pass-through relationship showed that there is an incomplete but high exchange rate pass-through from exchange rate to domestic prices.

The contribution of this thesis is to build a small macro-econometric model of the Namibian economy, which demonstrates that there is significant statistical support for the hypothesis that there is a contemporaneous relationship between real wage, productivity, unemployment and interest rates in Namibia. This phenomenon has not yet been exploited using macro-econometric modelling, and thus, represents a significant contribution to modelling literature in Namibia. The determination of the sources of unemployment also receives special attention given that high unemployment is a chronic problem in Namibia. All models specified and estimated in the study use the SVAR methodology for the period 1980 to 2013. The study develops a small macro-econometric model using three modular experiments, which include, a basic model, models that separately append demand and exchange rate channels variables to the basic model, and the specification of a small macro-econometric model. The ultimate aim is to find out if monetary policy plays a role in influencing labour market and nominal variables. The hypothesis that the basic real wage, productivity, unemployment rate and interest rate system can be estimated simultaneously is validated. Further, demand and exchange rate channels variables are found to have important additional information, which explains the monetary transmission process, and that shocks to labour market variables affect monetary policy in Namibia. The results also show that the demand channel (import prices and bank credit to the private sector) and the exchange rate channel (nominal exchange rate) variables have important additional information, which affects monetary transmission process in Namibia, which justifies their inclusion in the small macro-econometric model. In addition, shocks to the import price and exchange rate in the macro-econometric model significantly affect labour market variables. However, shocks to bank credit only partially perform as expected, implying that its results need to be considered cautiously. The study further finds that tight monetary policy shocks significantly affect real and nominal variables in Namibia. The results also show that shocks to all variables in the unemployment model significantly affect unemployment, suggesting that the hysteresis assumption is corroborated. This implies that long run aggregate demand is non-neutral in Namibia. / Economics / D. Litt. et Phil. (Economics)