The Design and Effects of Monetary Policy in Sub-Saharan African Countries

Since the 1990s there have been a number of major changes in the design and conduct of monetary policy. In a globalized environment, there is less time to adjust to shocks and greater need to achieve closer convergence of economic performance among trading partners. As a result, a number of developing countries have adopted exchange rate regimes with more flexibility, and thereby greater scope for monetary policy. Notable examples include a number of sub-Saharan African countries moving from fixed exchange-rate regimes to more flexible regimes and the adoption of formal or informal inflation targeting regimes by some of these countries. These changes have triggered considerable debate on how monetary policy should be conducted and the effects it has on the real economy. Mohsin Khan provides an overview of the current monetary policy debate. He discusses the conventional objectives, targets, and instruments of monetary policy, including an analysis of the monetary transmission process, which looks at the traditional “money” view as well as the credit channel. Khan examines the problems of dynamic inconsistency and inflationary bias, where governments deviate from their stated or target inflation level in order to obtain shortrun output gains. The various solutions proposed to overcome the dynamic inconsistency problem lead to another debate on rules versus discretion in monetary policy. Most economists now agree that any rules-based regime permits a margin for discretion, and they reject the idea that rules and discretion are mutually exclusive. As policymakers in many countries throughout the world have gravitated toward an approach based more on rules than on full discretion, a key issue is choosing an appropriate policy target, or nominal anchor. Khan offers a detailed discussion on nominal anchors and current monetary frameworks before moving on to analyze the output effects of monetary policy. He looks at the relationship between the growth of GDP and different monetary aggregates in 20 sub-Saharan African economies and finds empirical support for the hypothesis that credit growth is more closely linked than is money growth to the growth of real GDP in these countries. JEL Codes: E52, N17