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Does money matter in Africa? New empirics on long- and short-run effects of monetary policy on output and prices

Simplice A. Asongu (African Governance and Development Institute, Yaoundé, Cameroon)

Indian Growth and Development Review

ISSN: 1753-8254

Article publication date: 4 November 2014




The purpose of this paper is to examine the effects of monetary policy on economic activity using a plethora of hitherto unemployed financial dynamics in inflation-chaotic African countries for the period of 1987-2010.Although in developed economies, changes in monetary policy affect real economic activity in the short-run, but only prices in the long-run, the question of whether these tendencies apply to developing countries remains open to debate.


Vector autoregresion (VARs) within the frameworks of Vector Error Correction Models and simple Granger causality models are used to estimate the long- and short-run effects, respectively. A battery of robustness checks are also used to ensure consistency in the specifications and results.


The tested hypotheses are valid under monetary policy independence and dependence, except few exceptions. H1: Monetary policy variables affect prices in the long-run but not in the short-run. For the first-half (long-run dimension) of the hypothesis, permanent changes in monetary policy variables (depth, efficiency, activity and size) affect permanent variations in prices in the long-term. But in cases of disequilibriums, only financial dynamic fundamentals of depth and size significantly adjust inflation to the cointegration relations. With respect to the second-half (short-run view) of the hypothesis, monetary policy does not overwhelmingly affect prices in the short-term. Hence, but for a thin exception, H1 is valid. H2: Monetary policy variables influence output in the short-term but not in the long-term. With regard to the short-term dimension of the hypothesis, only financial dynamics of depth and size affect real gross domestic product output in the short-run. As concerns the long-run dimension, the neutrality of monetary policy has been confirmed. Hence, the hypothesis is also broadly valid.

Practical implications

A wide range of policy implications are discussed. Inter alia: the long-run neutrality of money and business cycles, credit expansions and inflationary tendencies, inflation targeting and monetary policy independence implications. Country-/regional-specific implications, the manner in which the findings reconcile the ongoing debate, measures for fighting surplus liquidity and caveats and future research directions are also discussed.


By using a plethora of hitherto unemployed financial dynamics (that broadly reflect monetary policy), we provide significant contributions to the empirics of money. The conclusion of the analysis is a valuable contribution to the scholarly and policy debate on how money matters as an instrument of economic activity in developing countries.



The author is highly indebted to the editor and referees for their useful comments.


A. Asongu, S. (2014), "Does money matter in Africa? New empirics on long- and short-run effects of monetary policy on output and prices", Indian Growth and Development Review, Vol. 7 No. 2, pp. 142-180.



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