Monetary policy shocks and economic growth in economic community of west African states.

Abstract

An effective economic management is contingent upon the knowledge of how shocks emanate from monetary policy and other sources that affect the economy. This study examines the monetary policy shocks and economic growth in the Economic Community of West African States (ECOWAS), segregated into sub-regions of WAMZ and WAEMU. This is carried out under three related sub-objectives, using quarterly secondary data from 1980(1) to 2020(4). The first objective offers an empirical investigation into the determinants of the monetary policy rate in ECOWAS, considering both internal and external variables, using ARDL. The results revealed that in order to ensure long-run stability in the policy rate among the members’ states of ECOWAS, determinant variables including exchange rate, inflation rate and the gross domestic product should be given closer attention, so that the trajectory for potent structure can be designed and incorporated into the economic structure and policy frameworks accordingly. The second objective of this study employed a Panel Structural Vector for the modelling of monetary policy transmission shock in the region. The key results suggest that fluctuations of the monetary policy do not have significant effects on economic growth but significantly impact the general price level. Moreover, the study finds that the exchange rate is persistently a vital mechanism that significantly influences the variables of the real economy. Our estimates further suggest that there is idiosyncratic evidence found in the results, which is the anomaly of Price puzzle. Furthermore, this study used the Markov switching model for the third objective to investigate the impact of monetary policy shocks in two regimes of the business cycles in ECOWAS countries. The results show that the countries are having common business cycles. In addition, the study offered enough evidence that the monetary instruments are significantly more potent at contractionary than expansionary regimes. ECOWAS region appears to have a comparatively shorter business cycle than the developed countries. Hence, the design of policies by the monetary authorities in this region, aimed at shortening the duration of the contractionary period must be meticulously formulated to avert negative consequences of strict contractionary policy and ditto to expansionary policy.