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

Abstract

PurposeThis study aims to provide empirical evidence of the pass-through effect of monetary policy on bank lending rates vis-à-vis the potential moderating effects of financial sector development and institutional quality in Africa.Design/methodology/approachThe study uses robust fixed effects panel data estimation techniques and data from 1990 to 2017 across 37 countries in Africa.FindingsThe 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 implicationsThe 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/valueThis 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.