Institutional Development and Monetary Policy Effectiveness: Empirical Evidence from African Economies

This study investigates whether institutional development measured in terms of government effectiveness improves the effectiveness of the monetary policy on output growth and inflation in Africa. Annual panel data for thirty-six African economies for 1996-2021 were employed in a system GMM estimation technique. We found strong evidence to support the effectiveness of monetary policy on inflation through government effectiveness. The interaction of monetary policy with government effectiveness significantly dampens inflation, whereas it could only improve output growth at its contemporaneous level and first lag. Therefore, this study recommends better monetary policy effectiveness through government effectiveness, political stability, corruption control and regulatory quality.