African bank lending channels workshop

Past Event Kampala, Uganda 27 Apr 2015 Firms and Large firms

IGC Uganda recently held a workshop with policymakers from Burundi, Kenya, Rwanda, Tanzania, Uganda, Ghana, Mozambique, and Zambia to discuss lending channels in Sub-Saharan Africa.

Monetary policy in Sub-Saharan Africa is evolving. The introduction of new technologies such as mobile money, as well as financial deepening is leading to unstable money multipliers and velocities. African central banks are increasingly moving to forward-looking inflation targeting to support macroeconomic stability amid economic development.

Effective inflation targeting relies on a predictable and well-understood monetary transmission mechanism. Studies using standard VAR methodology suggest that the magnitude of monetary transmission is small and uncertain. Given the weakness of macroeconomic data and clear anecdotal evidence of a monetary transmission mechanism, policymakers are keen to understand its various channels. Moving beyond the blunt VAR toolkit, econometric estimation that relies on micro data – meaning more observations, higher accuracy and less pronounced endogeneity – can yield more accurate results.

The main questions this research asks are: i) is there a bank lending channel of monetary policy transmission in the participating economies? ii) which bank characteristics affect monetary transmission in the respective countries, and how does this vary with the state of the banking system? iii) what are the differences in the bank lending channel between countries?, and iv) how strong will monetary transmission via the bank lending channel be within East African Monetary Union planned for 2024?

Event summary

In the morning session, IGC Uganda Country Economist Tim Ohlenburg revisited the theory and literature about the bank lending channel. After a brief review of empirical controversies in the field, seminal papers, other multi-country studies, and previous papers from Sub-Saharan Africa were reviewed. Participants then provided a detailed overview of their respective monetary policy approaches and banking systems.

In the afternoon session, Oxford University PhD candidate Sebastien Walker discussed the econometric estimation of the bank lending channel. Using Kenyan data as an example, he provided a step-by-step recipe for the estimation procedure in Stata. The practical exercise was designed to make the estimation process clear and show participants that practical implementation is not difficult if good data is available. The workshop ended with a constructive discussion about the research direction and next steps for the project.