The Transmission Channel of Monetary Policy to the Real Economy Revisited: Evidence From Sierra Leone

Abstract

This study examined the transmission channel of monetary policy to real economy in Sierra Leone using quarterly data from 2002 to 2018. The non-recursive structural vector autoregressive technique was employed to identify the channel of monetary policy transmission to the real economy. This technique was considered appropriate because it has two-way or bidirectional causal effects among endogenous variables and ordering of endogenous variables are considered flexible. Analysis of data shows that the exchange rate channel was found to be appropriate in transmitting monetary policy effect to real economy based on the results of impulse response and variance decomposition analysis. In light of the empirical findings, the study recommended that in a bid to have an effective monetary policy, the channels of monetary policy transmission, especially the exchange rate channel, should be taken into consideration in the design of monetary policy in Sierra Leone.