Analysing the nexus between financial structure and monetary policy impulses in sub-Saharan Africa

Abstract

Background: Gains in improving bank efficiency have widely been regarded as one of the most effective means of ensuring sustainability in a financial system.

Aim: It is proposed in this article to measure monetary policy impulses and the dynamic panel data model to examine the linear relationship.

Setting: The nexus between financial structure and monetary policy impulses is analysed, considering 21 sub-Saharan African (SSA) nations during the time period from 2011 to 2022.

Method: The Vector Autoregressive (VAR) analysis is employed to measure monetary policy impulses and the dynamic panel data model to examine the linear relationship.

Results: A significant positive association between competition in the banking system and monetary policy impulses was found. Monetary policy impulses are inversely and significantly related to financial development. Also, the size of the central bank has a significant positive influence on the effectiveness of monetary policy.

Conclusion: The financial structure has a significant role to play in the monetary transmission mechanism and credit markets help propagate and amplify shocks to the macro-economy.

Contribution: The relationship between financial structure and monetary policy is not a one-way street as these variables tend to influence one another. Empirical literature on the subject is not very recent and come to differing conclusions, hence the rationale for conducting this article in SSA, employing both the structural VAR model and the dynamic panel data model.