Towards a Rule-based Approach to Monetary Policy Evaluation in Sub-Saharan Africa-super- †

Stephen O'Connell ()

Journal of African Economies, 2011, vol. 20, issue suppl_2, -ii66

Abstract: I review the three-equation AS/IS/MP model that is at the core of the dynamic stochastic general equilibrium (DSGE) models in use within central banks in the industrial countries. Monetary policy (MP) rules play a central role in these models, and alternative rules can be compared in terms of their implications for the economy's dynamic adjustment to shocks. I discuss the advantages of DSGE modelling in low-income countries and show how interest-rate rules can be adapted to reflect the balance-sheet instruments widely used among African countries. I also identify features of the African economic environment that are poorly captured by existing models, including a large and volatile food sector, imperfect capital mobility and a credit channel for monetary policy. To illustrate the DSGE approach, I develop a model in which food supply shocks play a key role in inflation dynamics. I show that private storage can generate serial correlation of food price inflation when food price shocks are serially uncorrelated. Copyright 2011 The author 2011. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Date: 2011
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