Monetary Transmission Mechanism in Rwanda

Rusuhuzwa, Thomas Kigabo

doi:10.1007/978-981-33-6746-3_4

Cited by 1 publication

(1 citation statement)

References 23 publications

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“…This is confirmed by Tai et al (2012) who find that the rate of transmission from money market rates to deposit and lending rates was moderate and sluggish across economies in Asia. A similar conclusion is reached by Dube and Zhou (2014) for the case of South Africa, Kigabo and Mwenese (2016) and Davoodi et al (2013) for East Africa as a region, Ngoma and Chanda (2022) for the case of Zambia, Sande and Apaa Okello (2013) for Uganda, Misati et al (2011) for Kenya, Kigabo (2018) for Rwanda as well as Mbowe (2015) and Bashagi et al (2019) the case of Tanzania. Indeed, several factors have been identified as contributing to the incomplete pass-through, including weak market structure, limited bank competition, limited financial development, and volatile exchange rate movements.…”

Section: Some Empirical Considerationssupporting

confidence: 58%

Effectiveness of Monetary Policy Transmission Mechanism Through Interest Rate Channel in Tanzania

Kimolo,

Naumanga,

Mhoja

et al. 2023

Preprint

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This study investigates the effectiveness of monetary policy transmission through interest rates in Tanzania using quarterly data from 2002 to 2022. The study specifically examines how fluctuations in the monetary policy rate (measured by the repo rate) influence the overnight and 7-day interbank rates, as well as short-term and long-term lending and deposit rates, and consequently, the general price level and the overall economy. In pursuit of these objectives, the empirical analysis employs Autoregressive Distributed Lag (ARDL) to analyze the degree of interest rate pass-through and the Structural Vector Autoregressive (SVAR) model to scrutinize the efficacy of monetary policy transmission mechanism to the overall economy and prices through the interest rate channel. The study finds a complete pass-through of monetary policy rates to interbank market interest rates, with the 7-day interbank rate showing greater responsiveness to changes in policy rates than the overnight interbank rate. The pass-through to short-term deposit rates is statistically significant but low in the short run, with a higher degree than in previous studies indicating improvement in transmission. Furthermore, there is an incomplete pass-through of the policy rate to both short-term and long-term lending rates. In addition, the study finds that the transmission of monetary policy from policy rate to output and prices is weak. The study provides four key policy implications. First, the 7-day interbank rate could potentially serve as an operational target in the conduct of monetary policy. Second, the observed improvement in the transmission process could serve as a basis for supporting the adoption of an interest rate-based monetary policy framework in Tanzania. However, there are still limitations to this framework, and efforts should be made to address them. Third, to improve lending rates sensitivity in Tanzania, efforts should be made to address challenges related to bank-specific, industry-specific, and macroeconomic factors. Finally, efforts should be made to improve financial inclusion, financial market competition, and transparency of the Bank of Tanzania's monetary policy operations to improve monetary policy transmission.

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