Monetary Policy, Trade and Unemployment in Sub-Saharan Africa

Abstract

The study examined the relationship between monetary policy, trade and unemployment in Sub-Saharan Africa during the period of 2001 to 2022 using a quantitative approach. Employing panel data set from 39 countries in the region, the research assessed how fluctuations in monetary policy rates and trade openness influence unemployment outcomes, while accounting for the effects of key economic variables such as inflation rate, real GDP growth, government expenditure, FDI, and level of institutionalized democracy. The Generalised Methods of Moments (GMM) dynamic panel data estimation technique was used to estimate the study’s variables. The GMM was chosen to account for reverse causality problem and deal with the potential problem of endogeneity common with dynamic models. The GMM technique also allowed for the lagged dependant variable to be included as an independent variable. The results of the study highlight a strong persistence of unemployment in the Sub-Saharan African region over time. The findings indicate an inverse relationship between trade openness and aggregate unemployment rates and a positive relationship between trade openness and youth unemployment rates. Monetary Policy rates were found to have effect on youth unemployment but not on aggregate unemployment rates in Sub-Saharan Africa. The joint effect of monetary policy and trade openness on youth unemployment rates was positive. Based on the findings, it is recommended that governments of Sub-Sahara African Countries should actively formulate and implement policies that enhance trade, reduces and eliminates barriers to trade, effectively allocate resources to sectors that offer comparative advantage and promote employment in the region. Central banks should also consider the differential impacts of monetary policy frameworks on various demographic groups and design policies that specifically address the needs of the youth on the labour market in Sub-Saharan Africa.