An Estimated DSGE Model for Monetary Policy Analysis in Low-Income Countries

Abstract

This paper evaluates monetary policy trade-offs in low-income countries using a dynamic stochastic general equilibrium (DSGE) model estimated on data for Mozambique taking into account the sources of major exogenous shocks, and level of financial development. To our knowledge this is a first attempt at estimating a DSGE model for Sub-Saharan Africa excluding South Africa. Our simulations suggests that a exchange rate peg is significantly less successful than inflation targeting at stabilizing the real economy due to higher interest rate volatility, as in the literature for industrial countries and emerging markets.

Keywords: Monetary policy, Africa, Currency pegs, Inflation targeting, Low-income developing countries