Advertisement

Monetary policy and financial frictions in a small open-economy model for Uganda

  • Francis Leni Anguyo
  • Rangan Gupta
  • Kevin KotzéEmail author
Article

Abstract

This paper considers the role of financial frictions and the conduct of monetary policy in Uganda. It makes use of a dynamic stochastic general equilibrium model, which incorporates small open-economy features and financial frictions that are introduced though the activities of heterogeneous agents in the household. Most of the parameters in the model are estimated with the aid of Bayesian techniques and quarterly macroeconomic data from 2000q1 to 2015q4. The results suggest that the central bank currently responds to changes in the interest rate spread, despite the fact that capital and financial markets are relatively inefficient in this low-income country. In addition, the analysis also suggests that to reduce macroeconomic volatility, the central bank should continue to respond to these financial sector frictions and that it may be possible to derive a more favourable sacrifice ratio by making use of a slightly more aggressive response to macroeconomic developments.

Keywords

Monetary policy Inflation targeting Financial frictions Small open economy Low-income country Dynamic stochastic general equilibrium model Bayesian estimation 

JEL Classification

E32 E52 F41 

Notes

Supplementary material

181_2019_1728_MOESM1_ESM.pdf (1.2 mb)
Supplementary material 1 (pdf 1179 KB)

References

  1. Alpanda S, Kotzé K, Woglom G (2010) Should central banks of small open economies respond to exchange rate fluctuations? the case of South Africa. ERSA working paper, no. 174Google Scholar
  2. An S, Schorfheide F (2007) Bayesian analysis of DSGE models. Econom Rev 26(2–4):113–172CrossRefGoogle Scholar
  3. Baldini A, Benes J, Berg A, Dao MC, Portillo RA (2015) Monetary policy in low income countries in the face of the global crisis: a structural analysis. Pac Econ Rev 20(1):149–192CrossRefGoogle Scholar
  4. Ball L (1994) What determines the sacrifice ratio? In: Monetary policy. The University of Chicago Press, pp 155–193Google Scholar
  5. Berg A, Gottschalk J, Portillo R, Zanna L-F (2010a) The macroeconomics of medium-term aid scaling-up scenarios. IMF working papers, pp 1–45Google Scholar
  6. Berg A, Unsal DF, Portillo R (2010b) On the optimal adherence to money targets in a new-Keynesian framework: an application to low-income countries. IMF working papers (no. 10-134), Washington, International Monetary FundGoogle Scholar
  7. Bernanke BS, Gertler M, Gilchrist S (1999) The financial accelerator in a quantitative business cycle framework. Handb Macroecon 1:1341–1393CrossRefGoogle Scholar
  8. Blanchard O, Dell Ariccia G, Mauro P (2010) Rethinking macroeconomic policy. J Money Credit Bank 42(s1):199–215CrossRefGoogle Scholar
  9. Brooks SP, Gelman A (1998) General methods for monitoring convergence of iterative simulations. J Comput Graph Stat 7(4):434–455Google Scholar
  10. Calvo GA (1983) Staggered prices in a utility-maximizing framework. J Monet Econ 12(3):383–398CrossRefGoogle Scholar
  11. Cecchetti SG, Rich RW (2001) Structural estimates of the US sacrifice ratio. J Bus Econ Stat 19(4):416–427CrossRefGoogle Scholar
  12. Curdia V, Woodford M (2010) Credit spreads and monetary policy. J Money Credit Bank 42(s1):3–35CrossRefGoogle Scholar
  13. Fernández-Villaverde J (2010) The econometrics of DSGE models. SERIEs 1(1–2):3–49CrossRefGoogle Scholar
  14. Gali J, Monacelli T (2005) Monetary policy and exchange rate volatility in a small open economy. Rev Econ Stud 72(3):707–734CrossRefGoogle Scholar
  15. Gordon RJ, King SR, Modigliani F (1982) The output cost of disinflation in traditional and vector autoregressive models. Brook Pap Econ Act 1:205–244CrossRefGoogle Scholar
  16. Gray DF, García C, Luna L, Restrepo J (2011) Incorporating financial sector risk into monetary policy models: application to Chile. IMF working papers, pp 1–34Google Scholar
  17. Justiniano A, Preston B (2010) Monetary policy and uncertainty in an empirical small open-economy model. J Appl Econom 25(1):93–128CrossRefGoogle Scholar
  18. Kiyotaki N, Moore J et al (1997) Credit chains. J Polit Econ 105(21):211–248CrossRefGoogle Scholar
  19. McCulley P, Toloui R (2008) Chasing the neutral rate down: Financial conditions, monetary policy, and the Taylor rule. Global Central Bank Focus, pp 2002–2008Google Scholar
  20. Mishkin FS (1996) The channels of monetary transmission: lessons for monetary policy. Technical report, National Bureau of Economic ResearchGoogle Scholar
  21. Mishra P, Montiel PJ, Spilimbergo A (2010) Monetary transmission in low income countries. IMF working papers, pp 1–42Google Scholar
  22. Modigliani F, Miller MH (1958) The cost of capital, corporation finance and the theory of investment. Am Econ Rev 261–297Google Scholar
  23. Okun AM (1978) Efficient disinflationary policies. Am Econ Rev 68(2):348–352Google Scholar
  24. Patinkin D (1956) Money, interest, and prices: an integration of monetary and value theory. Row, Peterson, EvanstonGoogle Scholar
  25. Quadrini V (2011) Financial frictions in macroeconomic fluctuations. FRB Richmond Econ Q 97(3):209–254Google Scholar
  26. Rudebusch GD (2002) Term structure evidence on interest rate smoothing and monetary policy inertia. J Monet Econ 49(6):1161–1187CrossRefGoogle Scholar
  27. Schmitt-Grohé S, Uribe M (2003) Closing small open economy models. J Int Econ 61(1):163–185CrossRefGoogle Scholar
  28. Steinbach R, Du Plessis S, Smit B (2014) Monetary policy and financial shocks in an empirical small open-economy DSGE model. Technical report, EcoModGoogle Scholar
  29. Stiglitz JE, Weiss A (1981) Credit rationing in markets with imperfect information. Am Econ Rev 71(3):393–410Google Scholar
  30. Svensson LE (2012) The relation between monetary policy and financial policy. Int J Central Bank 8(S1 s 293):295Google Scholar
  31. Taylor JB (1993) Discretion versus policy rules in practice. In: Carnegie–Rochester conference series on public policy, vol 39. Elsevier, pp 195–214Google Scholar
  32. Taylor JB (2009) The financial crisis and the policy responses: an empirical analysis of what went wrong. Technical report, National Bureau of Economic ResearchGoogle Scholar
  33. Tobin J (1969) A general equilibrium approach to monetary theory. J Money Credit Bank 1(1):15–29CrossRefGoogle Scholar
  34. Tumusiime-Mutebile E (2012) Monetary policy statement. Technical report, Bank of UgandaGoogle Scholar
  35. Vlcek MJ, Roger MS (2012) Macrofinancial modeling at central banks: recent developments and future directions (no 12–21). International Monetary FundGoogle Scholar
  36. Vredin A (2015) Inflation targeting and financial stability: providing policymakers with relevant information. BIS working paper 503, Bank of International SettlementsGoogle Scholar
  37. Woodford M (2012) Inflation targeting and financial stability. Technical report, National Bureau of Economic ResearchGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  • Francis Leni Anguyo
    • 1
    • 2
  • Rangan Gupta
    • 3
    • 4
  • Kevin Kotzé
    • 1
    Email author
  1. 1.School of EconomicsUniversity of Cape TownRondeboschSouth Africa
  2. 2.Bank of UgandaKampalaUganda
  3. 3.Department of EconomicsUniversity of PretoriaPretoriaSouth Africa
  4. 4.IPAG Business SchoolParisFrance

Personalised recommendations