A wavelet analysis of monetary policy transmission channels in Morocco

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PurposeThis paper examines the effects of monetary policy and the interdependencies between the real economy, the financial sector and monetary variables.Design/methodology/approachThe authors employ the continuous wavelet transform to examine how the relationship between the variables in question evolves over time and across various frequencies.FindingsThe results underscore the ineffectiveness of the exchange rate channel. Despite monetary policy consistently leading long-term interest rates, its limited impact on investment suggests the interest rate channel may be less operational. Conversely, the study presents evidence supporting the credit channel’s effectiveness, not only in low market volatility but also during economic downturns. Finally, the examination of the asset prices channel uncovers that the stock market was influenced by monetary policy during its brisk ascent, while real estate led monetary policy.Practical implicationsThe study yields several practical implications. It emphasizes employing advanced mathematical methods to capture the dynamic relationships between monetary policy and economic variables. It highlights the importance of a resilient banking sector given its significant role in the economic advancement of the country. It underscores the need to develop a more inclusive and dynamic financial system and diversify funding alternatives for the private sector to make asset prices a pivotal channel for achieving monetary policy objectives. And with Morocco’s transition to an inflation targeting framework and a flexible exchange rate regime, assessing the effectiveness of the interest rate and exchange rate channels becomes crucial. While the innovative use of wavelet coherence methodology sets a precedent for evaluating monetary policy transmission channels in developing countries, urging researchers and policymakers to explore novel quantitative approaches.Originality/valueThis article stands out as one of the few to employ the wavelet coherence methodology to investigate monetary policy transmission across multiple channels, specifically within the context of a developing country.