Does Money Matter in Africa? New Empirics on Long- and Short-Run Effects of Monetary Policy on Output and Prices

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in January 2013Abstract Purpose -While in developed economies, changes in monetary policy affect real economic activity in the short-run but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate. In this paper, we examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period 1987-2010.Design/methodology/approach -VARs within the frameworks of VECMs and simple Granger causality models are used to estimate the long-run and short-run effects respectively. A battery of robustness checks are also employed to ensure consistency in the specifications and results.Findings -But for slight exceptions, the tested hypotheses are valid under monetary policy independence and dependence. Hypothesis 1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception Hypothesis 1 is valid. Hypothesis 2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real GDP output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid.Practical Implications -A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country/regional specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity, caveats and future research directions are also discussed.1 Simplice A. Asongu is Lead economist in the Research Department of the AGDI (asongus@afridev.org). 3Originality/value -By using a plet...

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