Financial development and monetary policy effectiveness in Africa

As African countries await the birth of her monetary union, the link between economic policies and the real economy will continue to dominate policy debate. This paper investigates whether financial development influences the effectiveness of monetary policy on output and inflation in Africa. We apply standard panel data techniques to annual data from 1990–2015 for a panel of 39 African countries, and find a weak relationship between financial development and monetary policy effectiveness in Africa. The results show no statistical evidence of the relationship for output growth, whereas a negative relationship exists in the case of inflation, but only at their contemporaneous levels. Thus, there is need to strengthen the monetary transmission mechanism in African countries through deliberate efforts to deepen financial sector development.