Monetary policy effectiveness in Africa: the role of financial development and institutional quality
Date
2021
Journal Title
Journal ISSN
Volume Title
Publisher
Journal of Financial Regulation and Compliance
Abstract
Purpose: This study aims to provide empirical evidence of the pass-through effect of monetary policy on
bank lending rates vis-à-vis the potential moderating effects of financial sector development and institutional
quality in Africa.
Design, methodology, and approach: The study uses robust fixed effects panel data estimation techniques
and data from 1990 to 2017 across 37 countries in Africa.
Findings: The results show that financial development aids in the effectiveness of monetary policy
transmission. A decomposition of financial development into financial institution development and financial
market development shows that financial institutional development is more influential with regard to
effectiveness of the interest rate pass-through compared to financial market development. This study again
shows that improvements in the quality of institutions reduced lending rates in African economies.
Practical implications: The findings present relevant policy implications regarding effective
transmission of monetary policy by linking the pursuit of institutional quality, characterized by the control of
corruption, political stability, regulatory quality, rule of law and the voice of accountability and development
of financial institutions with lending rates and ultimately the demand for growth capital.
Originality/value: This study contributes to the literature on the factors influencing the effectiveness of
monetary policy. This study considers financial sector development and institutional quality as conduits to
monetary policy effectiveness in developing African countries.
Description
Research Article
Keywords
Financial development, Lending rates, Monetary policy