سیاست های پولی و مکانیسم های انتقال آن در اریتره

The main purpose of this study is to identify the best practices of monetary policy implementation in the Eritrean economy. As such, the paper examines what kind of monetary policy and transmission mechanisms are relevant to the Eritrean economy. It also addresses which channels are effective and which are not and why. Vector Autoregressive modelling is employed over the study period 1996Q1–2008Q4. This paper addresses the argument that the bank lending is the sole functioning channel in low income economies. We find that interest rate and official exchange rate channels are inoperative. However, effective exchange rate and credit channels exist through the black foreign exchange market and credit issued to the government sector. The main policy implication of this study is that the Bank of Eritrea might be able to control inflation through manipulating the reserve requirement ratio.

As in many developed economies, monetary policy is expected to be useful policy instrument in the general development framework of developing countries. Although the procedures for implementing monetary policy instruments vary from country to country, depending on the socio-economic and political settings, there are some generic standards which some economies can rely on. The main research problem that this paper seeks to address is finding the most effective monetary policy transmission channels by identifying what monetary policy instruments are available for the Bank of Eritrea. To achieve this, first an investigation has been made into what kind of monetary policy the Eritrean economy pursues. Second, an examination has been carried out into what the Eritrean monetary policy transmission mechanisms (MPTMs) look like and which channels are effective. The main monetary policy instrument used by the Bank of Eritrea is the reserve requirement ratio. The Bank of Eritrea also uses government treasury bills. Another policy instrument, which was set at 5.5% in 1994 but has not been implemented since then, is the rediscount window. Since the rediscount window is inoperative and both the lending and the deposit rates are rigid, the interest rate channel is ineffective. However, the economy can be managed through the credit and exchange rate channels by minimizing government expenditure and addressing the black market rate. The remaining part of this paper is organized as follows: discussion of the literature is followed by discussion of monetary policy and its performance in Eritrea. Section 5 presents the monetary policy transmission channels. This is then followed by the explanation of model specification and data collection. Section 8 provides the discussion of empirical findings. Section 9 presents the conclusion of the study.

A survey on the effectiveness of monetary policy transmission mechanisms in low income economies, by Mishra and Montiel (2012), shows that bank lending is the only operating channel in these economies. The effectiveness of the bank lending channel, however, is an empirical issue which varies from one country to another. In line with their argument, this study finds a functioning credit channel in the Eritrean economy. Unlike some of the earlier studies, however, this research indicates an effective credit channel. Further examination of the credit channel shows that its effectiveness comes from the credit issued to the government sector. This implies that the Bank of Eritrea has to be independent and that there should be fiscal discipline. In line with the findings of most of the literature, there is an ineffective credit channel through the credit issued to the private sector. This demonstrates that the private sector may have external sources of financing for its expenditures. The results suggest that the Eritrean monetary authority can manipulate the reserve requirement ratio in order to control inflation in the economy. The effectiveness of the reserve requirement ratio, however, is short lived, especially when the exchange rate channel is included in the base line model. On the other hand, the effectiveness of the reserve requirement ratio to manage GDP is very limited which shows the ineffectiveness of monetary policy to achieve this goal. According to the literature, the exchange rate channel is inactive in most low income economies mainly due to the intervention of the central banks in the foreign exchange market. Although this is the case with the official exchange market in Eritrea, the results suggest that there is an effective black market exchange rate channel. There are two key implications that can be drawn from this. First, the studies that overlook the role of the black market foreign exchange through which most import expenditures are commonly financed in most low income economies might be misleading. It is important to consider that the active operation of the black market foreign exchange market is likely to hinder the monetary authorities in controlling the effectiveness of monetary policy and thereby its effective achievement of monetary policy objectives. Second, it is time for the Bank of Eritrea to address the issue of the black market foreign exchange and formulate foreign exchange policy which would transform the market and ease inflation. The Bank of Eritrea, therefore, should revisit its official exchange rate and make it more competitive and operative.