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Monetary policy effectiveness in Africa: the role of financial development and institutional quality

Author

Listed:
  • Vera Fiador
  • Emmanuel Sarpong-Kumankoma
  • Nana Kwasi Karikari

Abstract

Purpose - This study aims to provide empirical evidence of the pass-through effect of monetary policy on bank lending ratesvis-à-visthe potential moderating effects of financial sector development and institutional quality in Africa. Design/methodology/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.

Suggested Citation

  • Vera Fiador & Emmanuel Sarpong-Kumankoma & Nana Kwasi Karikari, 2022. "Monetary policy effectiveness in Africa: the role of financial development and institutional quality," Journal of Financial Regulation and Compliance, Emerald Group Publishing Limited, vol. 30(3), pages 335-352, January.
    • Handle: RePEc:eme:jfrcpp:jfrc-03-2021-0024
    DOI: 10.1108/JFRC-03-2021-0024
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    Cited by:

    1. Japan Huynh, 2023. "The monetary policy pass-through mechanism: Is the search-for-yield incentive at work?," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-12, December.

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