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Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana
This paper constructs a small open economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model, to examine monetary policy conduct and the extent of exchange rate pass-through in Botswana. Thus, I apply a three-step procedure. In the first step, I estimate the degree of exchange rate p...
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| Format: | Thesis |
| Language: | English |
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School of Economics
2020
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| _version_ | 1867613199247867904 |
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| access_status_str | Open Access |
| author | Nkwe, Tlotlo Pauline |
| author2 | Mateane, Lebogang |
| author_browse | Mateane, Lebogang Nkwe, Tlotlo Pauline |
| author_facet | Mateane, Lebogang Nkwe, Tlotlo Pauline |
| author_sort | Nkwe, Tlotlo Pauline |
| collection | Thesis |
| description | This paper constructs a small open economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model, to examine monetary policy conduct and the extent of exchange rate pass-through in Botswana. Thus, I apply a three-step procedure. In the first step, I estimate the degree of exchange rate pass-through to Consumer Price Index (CPI) and import prices using a Vector Error Correction model (VECM). Secondly, I carry out simulations using trade openness parameter value suggested by the imports and exports to GDP ratio for Botswana and using parameter values consistent with Justiniano and Preston (2010). The simulations allow me to establish the impact of different economic disturbances on Botswana’s business cycle fluctuations and the extent to which these economic disturbances influence Botswana’s business cycle fluctuations. Following this set-up, using time series data for Botswana’s macro-economic variables for the period 2004:Q1-2017:Q4 obtained from Bank of Botswana I use Bayesian methods to estimate the DSGE model. I find that in the short-run, exchange rate pass-through to CPI and imports prices is low, at 12 percent and 5 percent, respectively. Secondly, the simulations show that imports cost-push shock leads to a decrease in consumption by a higher magnitude than the decrease in output. The estimation results show that the central bank allocates the largest weight towards price stability as compared to other target variables such as the output gap, in its monetary policy rule. Moreover, the monetary policy shock, import cost-push shock and risk premium are responsible for majority of the business cycle fluctuations in Botswana. These findings may be useful for policy makers and in particular in guiding their policy decision making because of the suggested variables that may influence business cycle fluctuations in Botswana. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/30887 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:32:20.328Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2020 |
| publishDateRange | 2020 |
| publishDateSort | 2020 |
| publisher | School of Economics |
| publisherStr | School of Economics |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/30887 Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana Nkwe, Tlotlo Pauline Mateane, Lebogang Economics This paper constructs a small open economy New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model, to examine monetary policy conduct and the extent of exchange rate pass-through in Botswana. Thus, I apply a three-step procedure. In the first step, I estimate the degree of exchange rate pass-through to Consumer Price Index (CPI) and import prices using a Vector Error Correction model (VECM). Secondly, I carry out simulations using trade openness parameter value suggested by the imports and exports to GDP ratio for Botswana and using parameter values consistent with Justiniano and Preston (2010). The simulations allow me to establish the impact of different economic disturbances on Botswana’s business cycle fluctuations and the extent to which these economic disturbances influence Botswana’s business cycle fluctuations. Following this set-up, using time series data for Botswana’s macro-economic variables for the period 2004:Q1-2017:Q4 obtained from Bank of Botswana I use Bayesian methods to estimate the DSGE model. I find that in the short-run, exchange rate pass-through to CPI and imports prices is low, at 12 percent and 5 percent, respectively. Secondly, the simulations show that imports cost-push shock leads to a decrease in consumption by a higher magnitude than the decrease in output. The estimation results show that the central bank allocates the largest weight towards price stability as compared to other target variables such as the output gap, in its monetary policy rule. Moreover, the monetary policy shock, import cost-push shock and risk premium are responsible for majority of the business cycle fluctuations in Botswana. These findings may be useful for policy makers and in particular in guiding their policy decision making because of the suggested variables that may influence business cycle fluctuations in Botswana. 2020-02-06T11:57:24Z 2020-02-06T11:57:24Z 2019 2020-02-04T06:57:14Z Master Thesis Masters MCom http://hdl.handle.net/11427/30887 eng application/pdf School of Economics Faculty of Commerce |
| spellingShingle | Economics Nkwe, Tlotlo Pauline Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana |
| thesis_degree_str | Master's |
| title | Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana |
| title_full | Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana |
| title_fullStr | Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana |
| title_full_unstemmed | Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana |
| title_short | Monetary Policy in a Low Exchange Rate Pass-Through Environment: The case of Botswana |
| title_sort | monetary policy in a low exchange rate pass through environment the case of botswana |
| topic | Economics |
| url | http://hdl.handle.net/11427/30887 |
| work_keys_str_mv | AT nkwetlotlopauline monetarypolicyinalowexchangeratepassthroughenvironmentthecaseofbotswana |