Towards A Rule-Based Approach To Monetary Policy Evaluation In Sub-Saharan Africa

Authors

Stephen A. O'Connell, Swarthmore CollegeFollow

Document Type

Article

Publication Date

2011

Published In

Journal Of African Economies

Abstract

I review the three-equation AS/IS/MP model that is at the core of the dynamic stochastic general equilibrium (DSGE) models in use within central banks in the industrial countries. Monetary policy (MP) rules play a central role in these models, and alternative rules can be compared in terms of their implications for the economy's dynamic adjustment to shocks. I discuss the advantages of DSGE modelling in low-income countries and show how interest-rate rules can be adapted to reflect the balance-sheet instruments widely used among African countries. I also identify features of the African economic environment that are poorly captured by existing models, including a large and volatile food sector, imperfect capital mobility and a credit channel for monetary policy. To illustrate the DSGE approach, I develop a model in which food supply shocks play a key role in inflation dynamics. I show that private storage can generate serial correlation of food price inflation when food price shocks are serially uncorrelated.

Recommended Citation

Stephen A. O'Connell. (2011). "Towards A Rule-Based Approach To Monetary Policy Evaluation In Sub-Saharan Africa". Journal Of African Economies. Volume 20, Issue Suppl. 2. ii36-ii66. DOI: 10.1093/jae/ejq024
https://works.swarthmore.edu/fac-economics/25