Abstract
In this article, we empirically examine the operation of the traditional Keynesian interest rate channel of the monetary policy transmission mechanism in five emerging economies in the Middle East and North Africa (MENA) region and compare it with 14 inflation targeting (IT) emerging market economies (EMEs) using dynamic panel data analysis. Contrary to some existing studies, our empirical results provide no support for the argument that the traditional Keynesian interest rate channel is weak or does not operate effectively in the MENA region: both private consumption and investment in the MENA EMEs are sensitive to movements in real interest rates (although, in the case of private consumption, not independently of the level of financial development). We also find that interest rate elasticities of private consumption and private investment vary significantly with the level of development of the domestic financial market in the MENA EMES comparable to that in IT countries. Finally, our findings suggest that liberalization of the capital account has a significantly positive impact on private sector demand in MENA EMEs similar to that in the IT EMEs.
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Notes
Excluding the so-called “economies of transition” (the Czech Republic, Hungary, Poland, and Romania) from the IT EMEs and re-estimating the equations did not have any significant impact on the empirical results.
Due to data availability we use WEO forecasts.
Following some empirical studies we also controlled for remittances from abroad in our estimated equations. However, we did not find any significant impact of remittances on either private consumption or investment for either IT EMEs or for the MENA EMEs. Consequently, in the estimated equations reported in this paper we have dropped remittances as an explanatory variable.
Stationarity test results are available upon request.
Breusch–Pagan test statistic, a Lagrange multiplier measure, is distributed \(\chi ^{2}\)(p) under the null hypothesis of homoskedasticity. For IT consumption function, the Breusch–Pagan LM statistic: 92.92018 \(\chi ^{2}\) p value = 1.4e\(-\)15; For IT investment function, the Breusch–Pagan LM statistic: 22.09768 \(\chi ^{2}\) p value \(=\) 0.0047; for non-IT MENA consumption function, the Breusch–Pagan LM statistic: 27.70852 \(\chi ^{2}\) p value \(=\) .0016; for non-IT MENA investment function, the Breusch–Pagan LM statistic: 24.12635 \(\chi ^{2}\) p value \(=\) 0.0011. These test statistics suggest that in all above cases we reject the null hypothesis of homoskedasticity.
Arellano–Bond serial correlation test is widely used to test whether or not the model error terms are serially autocorrelated at levels in a dynamic panel set-up.
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Mukherjee, S., Bhattacharya, R. Do the Keynesian monetary transmission mechanisms work in the MENA region?. Empir Econ 48, 969–982 (2015). https://doi.org/10.1007/s00181-014-0824-8
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DOI: https://doi.org/10.1007/s00181-014-0824-8
Keywords
- Monetary transmission
- Private consumption
- Private investment
- Interest rate elasticity
- Financial market development
- Capital openness