Journal Article

Towards a Rule-based Approach to Monetary Policy Evaluation in Sub-Saharan Africa

Stephen A. O'Connell

in Journal of African Economies

Volume 20, issue suppl_2, pages ii36-ii66
Published in print May 2011 | ISSN: 0963-8024
Published online May 2011 | e-ISSN: 1464-3723 | DOI: http://dx.doi.org/10.1093/jae/ejq024
Towards a Rule-based Approach to Monetary Policy Evaluation in Sub-Saharan Africa

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  • Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling
  • Development Planning and Policy
  • Agricultural Economics
  • Monetary Policy, Central Banking, and the Supply of Money and Credit
  • Economic Development

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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.

Keywords: C60; E50; O11; O23; Q11

Journal Article.  10023 words.  Illustrated.

Subjects: Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling ; Development Planning and Policy ; Agricultural Economics ; Monetary Policy, Central Banking, and the Supply of Money and Credit ; Economic Development

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