Narrow Results

Given the increasing economic ties between African countries and China, this study investigates the effects of China’s output and monetary policy shocks on African countries’ macroeconomic performance for the period 1995q1 to 2021q4. The study formulates and estimates a dynamic stochastic general equilibrium (DSGE) model with the Bayesian technique. The results show that China’s output and monetary policy shocks impact African countries’ macroeconomic performance. The findings indicate that China’s output and monetary policy shocks affect output, inflation and exchange rates in African economies through the trade and financial channels. However, the results show that China’s output shocks have greater impacts on output and inflation while China’s monetary policy shocks have stronger impacts on exchange rate in African countries. The study recommends that African countries should deepen their intra-regional trade, promote economic diversification and monitor China’s business cycles and policies so as to reduce their vulnerabilities to China’s macroeconomic shocks.

Several studies have suggested that the prediction of standard theory on the effects of monetary policy on the exchange rate might not be applicable to or in the case of the Republic of Korea because participation of foreign investors is weak in the bond market but strong in the stock market. The current study examines the effects of monetary policy shocks on the exchange rate in the Republic of Korea by using structural vector autoregression models with sign restrictions. To determine the channels by which monetary policy shocks affect the exchange rate, I investigate the effects on various components of capital flows. The main empirical findings are as follows. First, a contractionary monetary policy shock, which increases the interest rate, appreciates the Korean won significantly in the short run as predicted by most theories. Second, contractionary monetary policy shocks increase capital inflows into the bond market consistent with the prediction of the uncovered interest parity condition. This seems to be the main channel by which contractionary monetary shocks appreciate the won. Finally, foreign investors tend to withdraw money from the domestic stock market in response to a monetary tightening, resulting in a decrease in capital inflows.

In this chapter, we explore the issues raised by attempts to coordinate monetary policy among G20 countries. There is very limited knowledge about the impact of monetary policy in the G7 countries on other G20 economies.We therefore study the effect of US monetary policy decisions on exchange rate, interest rate and export for a panel of non-G7 countries such as Mexico, Korea, China, and India. Using an identification framework based on the heteroscedasticity of structural shocks, we show that the impact of US monetary policy on different developing countries is not the same and is also different compared to G7 countries. Therefore, we conclude that coordinated monetary actions among G20 members need to be based on a better understanding of the interdependencies among G20 members.