Modeling the effect of credit channel of monetary transmission mechanism in Rwanda.

Abstract

This study investigated the impact of credit channel of monetary transmission mechanism in executing monetary policies in Rwanda, during the period 2005-2015. The study employed a VAR methodology using impulse response graphs and variance decomposition to test the relative impact of the different variables tested being repo rate, money supply (M3), consumer price index (CPI), gross domestic products (GDP) and savings and investment, the data set was quarterly collected from national bank of Rwanda. And to find out whether credit channel is more effective or ineffective.

The empirical analysis found two interesting results. First, all variables was stationary at level I (0) using e-views. Second, with exception of innovation (M3), there exists significant influence of credit channel of monetary transmission shock to GDP and CPI, although weak and a strong significant influence on economic growth. The overall result reveals that R-squared is 0.83 and adjusted R-squared is 0.68 indicating that 68 percent of the variations in inflation could be explained by the combined effect of changes in all independent variables and The overall result reveals that R-squared is 0.66 and adjusted R-squared is 0.75 indicating that 75 percent of the variations in credit to private sector could be explained by the combined effect of changes in all independent variables.

Keywords: credit channels, monetary transmission, VAR