Commodity price shocks and monetary policies in commodity exporting African countries - A DSGE analysis

Abstract

The study investigates alternative monetary policy rules in commodity-exporting African countries, by formulating, estimating and simulating a DSGE model for 5 African countries. We apply the Bayesian technique for our estimation and utilize impulse response functions to evaluate alternative monetary policy rules to commodity price shocks. Our results show that commodity price shocks influence business cycle fluctuations in African countries, whereas the results from alternative monetary policy rules are mixed. The findings show that nominal GDP targeting (NGDPT) is the best policy rule to minimize output volatility and price variations against positive commodity price shocks. However, if the objective is to minimize the effects of positive commodity price shocks on the exchange rate, the inflation targeting (IT) is the best policy rule. Further, the findings shows that IT and NGDPT are the best policy rules to stabilize output and prices against negative commodity price shocks while exchange rate targeting (ERT) is the best policy rule to stabilize exchange rate against negative commodity price shocks.