MONETARY POLICY PASS THROUGH TO INFLATION IN SELECTED SUB-SAHARAN AFRICAN COUNTRIES.

Abstract

Practical evidence suggests that monetary policy is a crucial tool for managing global
inflation. This study, grounded in monetary and Keynesian theories, examined the impact
of monetary policy pass-through to inflation in selected sub-Saharan African (SSA)
countries from 1987 to 2022 using a panel vector error correction model (PVECM). This
study considered inflation as the dependent variable and lending rate, deposit rate,
nominal effective exchange rate, broad money supply and credit to the private sector as
independent variables for monetary policy transmission. The results reveal that inflation
positively reacts to lending rate and broad money supply shocks over a 10-year period,
while deposit rate, nominal effective exchange rate and credit to the private sector
exhibited varying elastic responses, both positive and negative. The results of the
variance decomposition showed that interest rate proxied by the lending rate was
identified as the most effective channel, followed by broad money supply, nominal
effective exchange rate, deposit rate and credit to private sectors. Based on these
findings, this study recommends that the central banks of selected SSA countries should
raise lending rates and exercise stricter control over the money supply to combat
inflation effectively. Also, there is a need to boost productivity, this will help to reduce
import dependence and mitigate inflation stemming from trading partners in SSA
countries.