The Dynamics of External Shocks and the Effectiveness of Monetary Policy Transmission Channels in Sub Sahara African Countries

Abstract

This study examined the extent to which external shocks influence the effective monetary policy transmission mechanisms in the Sub-Saharan African countries in the periods between 1980 and 2024. The Recursive Structural Vector Autoregressive modelling approach was employed to capture the dynamic interactions, interactive effects among key variables and ascertain the most active channels of the monetary policy transmission shocks in the SSA countries. The study revealed the stationarity of the variables at levels and thus established the existence of long run relationships among the variables. The study found that monetary policy transmission effectiveness in SSA is largely influenced by external shocks from financial sector development, macroeconomic performance and the financial institution development index variables, while shocks originating from financial market development index constituted the least active policy transmission channels. This suggests that monetary policy transmission effectiveness is largely influenced by external shocks from financial sector development index and macroeconomic performance variables. Central banks and monetary authorities should thus, adopt an adequate appropriate policy that would leverage the shocks from both financial development and macroeconomic performance in order to reduce the effects of these shocks and boost the monetary policy transmission effectiveness in the SSA countries.