Effectiveness of Monetary Policy Transmission Mechanisms on Macroeconomic Objectives

Abstract

Using a dynamic panel VARDL model with pooled mean group data estimate, this study investigated the impact of monetary policy transmission channels on macroeconomic objectives in selected East African nations. Using annual data from 1992 to 2017, we investigated the dynamic effects of the exchange rate, real interest rate, domestic credit, and wide money supply on the rate of economic growth, the consumer price index (CPI), and the balance of payments. The variables and their connections to the dependent variables were investigated using three models: the panel unit root test, the Pedroni co-integration test, and the pooled mean group estimation. According to the empirical data, the real interest rate, the broad money supply, and the exchange rate all have positive long-term effects on the rate of economic growth in a model of economic growth. The real interest rate and exchange rate have a long-term negative impact on the CPI, whereas domestic credit and the overall money supply have a long-term positive impact. The balance of payments is benefited both immediately and over the long term by exchange rates and domestic credit. Therefore, in order to achieve effective economic growth and a balance of payments for a stable consumer price index, we advise the government to concentrate on these three factors: the price of commodities, the money supply, and the channels of currency devaluation.