ESTIMATING EFFECTIVENESS OF MONETARY POLICY IN ZAMBIA USING MONETARY RESPONSE FUNCTIONS.
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Date
2017-05-10
Authors
Mwafulirwa, Jane
Journal Title
Journal ISSN
Volume Title
Publisher
University Of Bostwana
Abstract
This study reviewed the effectiveness of monetary policy in Zambia using monetary response
functions. The Zambian monetary policy has consisted of monetary aggregates as policy
instrument from 1992 to 2012 and policy rate from 2012 to present. Effectiveness of the
monetary policy was therefore estimated by running two monetary response functions, each
based on one of the policy instruments. The effectiveness was determined by the policy
instrument that is more responsive to macroeconomic changes. A VAR model was employed
to estimate both monetary response functions using quarterly data for the period 2000 to
2016.
The conclusions are based solely on the impulse response functions and the variance
decomposition functions as it provides a standard deviation of the impacts of the
macroeconomic variables on the monetary policy instruments. The results indicate that the
policy rate responds positively to inflation gap, output gap, exchange rates and the lagged
policy rate. This is in line with Taylor’s rule and shows the Central Bank systematic
behaviour in monetary policy. The policy rate is seen to be biased towards output
stabilization. The other response functions show that money supply responds negatively to
inflation gap, output gap, exchange rates and lagged money supply. The money supply is
biased towards inflation gap. The exchange rate is also observed to greatly impact money
supply as an intermediate instrument. Based on this, we conclude that money supply is more
effective in stabilising price, which is the main objective of monetary policy. Exchange rates
aid in stabilizing price making the money supply instrument more effective than interest rate.