Price and liquidity puzzles of a monetary shock: Evidence from indebted African economies

Stella Muhanji, Christopher Malikane and Kalu Ojah

Economic Modelling, 2013, vol. 33, issue C, 620-630

Abstract: Price and liquidity puzzles have been identified as two major counterintuitive findings arising from monetary shocks. We investigate their presence in eleven African countries, using a dynamic stochastic general equilibrium model designed for indebted small open-economies. Our simulations reveal that the majority of African countries report a price puzzle whereas only three countries exhibit liquidity effect. In many of the sampled countries, a positive money growth shock drives interest rates up, but consumption and output fall in contrast to the conventional view. External debt increases in response to money growth shock, exchange rate appreciates and inflation falls. Money growth shocks are transmitted to the economy through the exchange rate channel when uncovered interest rate parity condition holds. Our findings therefore appear to suggest that monetary policy in Africa should prioritize foreign debt stabilization by reacting more to output gap than to inflation.

Keywords: Price puzzle; Liquidity puzzle; Monetary policy; External debt; DSGE model; Africa (search for similar items in EconPapers)
JEL-codes: C68 E31 E43 E52 F43 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:33:y:2013:i:c:p:620-630

DOI: 10.1016/j.econmod.2013.04.048

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