Money channel of monetary policy transmission in Namibia

Abstract

There is an argument that being in an exchange rate pegging arrangement limits the scope of using interest rate to control money supply to affect output or inflation but here is a point of contention in the case of Namibia. This is due to the fact that the major concern in an exchange rate pegging arrangement is that it obliges the central bank (BoN) to limit money creation to levels comparable to those of the anchor country (South Africa), to which the Namibia dollar is pegged. This is because the process of money creation is associated with increase in domestic inflation pressures. This study includes four variables: real output; consumer price level; aggregate money supply; and repo rate, in the structural vector error correction (SVECM) model, to analyse the money channel for monetary policy transmission in Namibia. The model estimated utilised quarterly time-series data covering the period 2000:Q1 to 2016:Q4. The results show that money supply contains information on the monetary policy transmission process, but, there are more factors involved in the responses of output to the repo rate shocks than consumer prices alone.