Monetary policy transmission mechanism in Botswana: A time-varying parameter VAR approach

Master Thesis

2021

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This study examines the evolution of Botswana's monetary policy transmission mechanism by employing a time-varying parameter model. Botswana provides a good context for assessing the transmission of monetary policy over time, following structural and macroeconomic reforms since 1989. The time-varying parameter vector autoregressive (TVP-VAR) model with stochastic volatility is employed for quarterly time series data from 1994Q1 to 2018Q4. The study evaluates how the responses of real non-mining output and price levels to the Bank Rate, exchange rate, and credit shocks changed over time. The paper contributes to the literature by capturing the timevarying nature of the underlying structure of the monetary policy and the economy of Botswana. The empirical results indicate that real output, inflation, and exchange rate responses to monetary policy shocks changed over time under the study period, confirming the time-varying nature of monetary policy transmission for Botswana.
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