Has Policy Rate Been an Effective Tool in Taming Inflation?: A Sub-Saharan African Perspective
Has Policy Rate Been an Effective Tool in Taming Inflation?: A Sub-Saharan African Perspective

Summary/Abstract: This paper explores the effectiveness of monetary policy rate as a tool to tame inflation in sub-Saharan Africa (SSA) using the system GMM estimator and other econometric approaches. Financial data (unconsolidated) from Orbis for the period 2011-2018 was used for the pur- pose of this study. We find that expected inflation, GDP growth rate, unemployment, the exchange rate, broad money supply, and policy rate significantly influence the inflation rate in SSA. The result clearly points to the fact that targeting inflation using monetary policy rate has not been an effective tool for taming inflation in SSA. To the extent that the baseline result indicates the monetary policy rate has no substantial impact on inflation in the region, there is therefore the need to re-evaluate monetary policy design that could help control inflation. In terms of potential policy implications of this paper based on our results, policy makers or monetary author- ities should not arbitrarily raise policy rate to control in- flation but should also consider other monetary policies such as money supply. The paper concludes that the credibility and accountability of the monetary policy authorities should be improved by setting targets appropriate to their institutional capacity and meeting them.

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