Monetary Policy, External Shocks and Economic Growth Dynamics in East Africa: An S-VAR Model

Resulting from the incessant political and economic uncertainty that bedevils the EAC region in the recent past, the various governments have used monetary policy changes in response to shocks from macroeconomic variables. However, the available literature shows a non-agreement by scholars as far as the dynamics in monetary policy, external shocks and macroeconomic activity connections are concerned, for both country-by-country analyses and regional assessments. This article widens the frontiers of knowledge about how the dynamics of monetary policy, external shocks and macroeconomic performance interact within the EAC economic region. We adopted the S-VAR method because of its contemporary nature as far as a transmission of monetary policy approach is concerned. The interconnectivity among the countries of EAC is an indication that any shock to the price of commodities (non-oil commodities) has significant implication on the exchange rate, which will be channelled through the supply of money and monetary policy to the GDP. The need to diversify the productive and export base of member countries, compared to the continuous dependence on one or a few products as the major source of income, is hereby advocated.

Automated summary

Due to political and economic uncertainty in the Eastern Africa Community (EAC) region, governments have used monetary policy changes to respond to shocks from macroeconomic variables. However, there is disagreement among scholars regarding the dynamics between monetary policy, external shocks, and macroeconomic activity, both in country-specific analyses and regional assessments. This article contributes to the understanding of how these factors interact in the EAC region by employing the S-VAR method, which is contemporary in the transmission of monetary policy approach.