Efficacy of monetary policy in a currency union? Evidence from Southern Africa's Common Monetary Area

The Common Monetary Area (CMA) agreement has effectively granted the South African government sole discretion over monetary policy and implementation in the region. The effectiveness of this arrangement has long been under discussion given the heterogeneity of member countries. This paper uses a structural vector autoregressive (SVAR) to examine the efficacy of the interest rate channel in the CMA. Specifically, our analysis uses data from 2000M1-2018M12 to examine how economic output, inflation, money supply, domestic credit, and lending rate spread for each member country respond to shocks in the South African repo rate. The main findings indicate that a positive shock to the South African repo rate has a statistically significant negative impact on economic output and a positive effect on inflation at the 10 percent level for all countries in the CMA. The results also show that money supply, domestic credit, and lending rate spread respond asymmetrically across members countries.