The Role of Credit, Money, and Exchange Rate Channels on Monetary Transmission Mechanism in Five East Africa Community (EAC) Countries

Abstract

In order to conduct successful monetary policy under monetary union it is important to understand the role of transmission channels in the monetary transmission mechanism. The performance of these channels is influenced by the economic structure prevailing in specific country; therefore differences in transmission mechanisms can generate different behavior in output to the real economy. This paper aim to examine the role of three transmission channels (credit, money supply and exchange rate) on monetary transmission mechanism in EAC countries, this is relevant to the region as these countries signed the protocol to form monetary union. The paper employ panel data approach with the cross section and time series data of five countries and twenty two year’s respectively. The findings reveal that money supply channel has positive and significant effect to the real economy hence it play important role in transmission of monetary policy in EAC countries. Remain channels (credit and exchange rate are not significant in transmission mechanism thus may not be important in transmission monetary policy to EAC countries. Key words— Monetary Transmission Mechanism; Credit channel; Money supply channel; Exchange rate channel; East Africa Community (EAC).