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The Econometrics of Factor Loadings and Implications for Monetary Policy in a Small Open Economy (2005- 2020) – Sierra Leone

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  • Christopher E.S. WARBURTON

    (Houghton University, New York, USA)

  • Emerson A. JACKSON

    (Bank of Sierra Leone, Freetown, Sierra Leone)

Abstract

In this paper, the authors explored the interaction of macroeconomic variables with some form of vague interrelationships. The relevance of factor analysis has demonstrated an existing association between manifest and latent variables in helping the researchers come out with informed and justified suggestions that are relevant to inform effective policy decisions for the central bank action in Sierra Leone. We examine the relationships among some significant manifest and latent variables in a small open economy (Sierra Leone) using time series data spanning from 2005 to 2020. Both international crude oil prices and the local currency in circulation were found to be loadable under two factors (domestic and external), while the exchange rate was observed to be loaded under the external factor. The outcome also proved that the effects of domestic and international economic shocks (sudden but temporarily disrupted) converged (dissipated) after six to eight months. The paper concludes that innovation and energy diversification are important for domestic and external stability in a small open economy.

Suggested Citation

  • Christopher E.S. WARBURTON & Emerson A. JACKSON, 2023. "The Econometrics of Factor Loadings and Implications for Monetary Policy in a Small Open Economy (2005- 2020) – Sierra Leone," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 10(1), pages 19-35, January.
    • Handle: RePEc:ist:iujepr:v:10:y:2023:i:1:p:19-35
    DOI: 10.26650/JEPR1082693
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    More about this item

    Keywords

    Bayesian Analysis; Economic Shocks; Exchange Rate; Factor Loadings; Manifest and Latent Variables JEL Classification : C22 ; E42 ; E51;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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