MONETARY TRANSMISSION MECHANISM IN RWANDA

Abstract

This study assessed the effectiveness of monetary transmission mechanism in Rwanda. On the basis of the specified VAR/VEC models, an interest rate channel, exchange rate channel and credit channel have been identified by using the time series (quarterly) data  from National Bank of Rwanda and the macroeconomic variables (Output, CPI inflation,, repo rate, International oil price and money supply) from 2000Q1 to 2015Q4.

The study has the specific objectives which are to estimate the dynamic influence of interest rate channel of monetary transmission mechanism on economic growth, to estimate the effect of exchange rate channel of monetary transmission mechanism on economic growth, to determine the effect of credit channel of monetary transmission mechanism on economic growth and to determine the effect of CPI, M3, REPORATE and international price oil on economic growth

This study first employed the stationary and co-integration techniques in order to determine if there exists a long-run relationship among the variables. The results from the variance decomposition revealed that in long run the credit channel will be effective more than other channels of monetary transmission mechanism by affecting the RGDP with a shock of 52.15% in long run at 64^th period followed by interest rate channel with a shock of 5.8% and lastly by exchange rate channel with a shock of 5.3% in long run at 64^th period. But in short run at 1^st period the interest rate channel is more effective with a shock of 13.75% on GDP followed by exchange rate channel and lastly credit channel with a shocks of 2.62% and 2.25% on GDP respectively. There is need for constant revision of policy and instruments targeting framework and operating procedure to enhance monetary policy effectiveness particularly in stabilizing the exchange rate and keeping inflation levels at the generally recommended rate. There is need for BNR to harmonize and combine the functionality of all channels to achieve optimum output goals of monetary transmission mechanism. The study suggests further research on analysis on interest rate channel when interacted with financial innovation variable on asset prices.  The further research could do also on the analysis of asset price channel on economic growth of Rwanda.