Efficacy of monetary policy in a currency union? Evidence from Southern Africa's Common Monetary Area

Bonang N. Seoela; Bonang N. Seoela

doi:10.3934/QFE.2022002

Quantitative Finance and Economics

2022, Volume 6, Issue 1: 35-53. doi: 10.3934/QFE.2022002

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Research article

Efficacy of monetary policy in a currency union? Evidence from Southern Africa's Common Monetary Area

Bonang N. Seoela ^,

Public Affairs Bureau, Idaho Department of Labor, Boise, Idaho, USA

Received: 06 December 2021 Revised: 12 January 2022 Accepted: 19 January 2022 Published: 09 February 2022
JEL Codes: E41, E51, E52, E58, F42

The Common Monetary Area (CMA) agreement has effectively granted the South African government sole discretion over monetary policy and implementation in the region. The effectiveness of this arrangement has long been under discussion given the heterogeneity of member countries. This paper uses a structural vector autoregressive (SVAR) to examine the efficacy of the interest rate channel in the CMA. Specifically, our analysis uses data from 2000M1-2018M12 to examine how economic output, inflation, money supply, domestic credit, and lending rate spread for each member country respond to shocks in the South African repo rate. The main findings indicate that a positive shock to the South African repo rate has a statistically significant negative impact on economic output and a positive effect on inflation at the 10 percent level for all countries in the CMA. The results also show that money supply, domestic credit, and lending rate spread respond asymmetrically across members countries.
- common monetary area,
- interest rate channel,
- monetary policy transmission mechanism,
- SVAR
Citation: Bonang N. Seoela. 2022: Efficacy of monetary policy in a currency union? Evidence from Southern Africa's Common Monetary Area, Quantitative Finance and Economics, 6(1): 35-53. doi: 10.3934/QFE.2022002

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Abstract

The Common Monetary Area (CMA) agreement has effectively granted the South African government sole discretion over monetary policy and implementation in the region. The effectiveness of this arrangement has long been under discussion given the heterogeneity of member countries. This paper uses a structural vector autoregressive (SVAR) to examine the efficacy of the interest rate channel in the CMA. Specifically, our analysis uses data from 2000M1-2018M12 to examine how economic output, inflation, money supply, domestic credit, and lending rate spread for each member country respond to shocks in the South African repo rate. The main findings indicate that a positive shock to the South African repo rate has a statistically significant negative impact on economic output and a positive effect on inflation at the 10 percent level for all countries in the CMA. The results also show that money supply, domestic credit, and lending rate spread respond asymmetrically across members countries.

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