Abstract
This study analyzed the interest rate channel, credit channel, exchange rate channel and asset price channel for monetary policy transmission mechanism in Namibia. The idea behind this study is to have a comprehensive study that covers a variety of channels for monetary policy transmission mechanism. The study utilized a Bayesian vector autoregression (BVAR) technique on quarterly time-series data covering the period 2000:Q1 to 2016:Q4. In particular, the validity of the data used is checked and verified by using two sets of prior distributions suggested by Sims and Zha as well as prior distribution of Koop and Korobilis. The variables used in this study are real output (Yt), real effective exchange rate (Et), inflation rate (P t), repo rate (Rt), housing price index (Ht) and credit extended to private sector (Lt). The findings revealed that interest rate and credit channels remain important in the transmission mechanism to this day. Notably the exchange rate and asset price channels are also slowly gaining prominence in monetary policy transmission mechanism. Therefore, the study provides useful information to the monetary authorities regarding the process of transmission mechanisms. This is quite important especially that the Central Bank (Bank of Namibia) is very serious about financial stability within the financial system, given the fragility of the financial systems in the world due to financial crisis.
Highlights
Namibia’s monetary policy arrangement dates back at time of independence in 1990
The data for the following variables were collected, real gross domestic product (Y), the real effective exchange rate (E), the inflation rate (P), the total credit extended to the private sector (L), the interest (R) and the real house prices index (H)
The series were found to be stationary in level form with the exception of real output and credit to the private sector; the null hypothesis of stationarity could not be rejected for the rest of the variables
Summary
Namibia’s monetary policy arrangement dates back at time of independence in 1990. In particular, Namibia’s monetary policy conduct in Namibia involves a fixed exchange rate regime as an agent used to control inflation in order to maintain financial stability (Sheefeni, 2013). The option of fixed exchange rate regime is in-line with Namibia’s decision to remain within the Common Monetary Area (CMA). This arrangement is formerly known as Rand Monetary Area, which consisted of Botswana, Lesotho, Swaziland and South Africa. It follows that the decision to remain in the CMA suggests abandonment of discretionary monetary policy, while giving more priority to maintaining a fixed peg against the rand (BoN, 2000). Article 4, Section 1 of the Bilateral monetary agreement, states that, “Against the aggregate amount of Namibian dollar currency issued by the Bank of Namibia, the Bank of Namibia shall maintain a reserve equivalent thereto in the form of Rand assets and freely usable foreign currencies in such proportion as the Bank of Namibia considers appropriate...” (BoN, 2000). The section emphasis the need to fulfill the backing rules, which is why the 1993 peg was on par though the rand remained legal tender in Namibia (Kalenga, 2001)
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