Monetary policy and financial development in Africa: Do governance mechanisms matter?

Abstract

Orientation: The financial system performs essential role in the mechanisms through which economic activities translate into economic growth and development of African economies, especially through their role in the allocation of finance from the surplus units to productive activities.

Research purpose: This article examines how monetary policy instruments impact the level of financial development in 37 African countries over the period 2002–2015. The article analyses how the governance systems in these countries can have both first- and second-order effects on the level of financial development through monetary policy mechanisms.

Motivation for the study: The need for the study emanates from the move toward monetary integration enshrined in the charter which culminated in the formation of the African Union. Inadequate discussion on the topic within the African continent also engineered interests in this investigation.

Research approach/design and method: To deal with any endogeneity issues, we perform the estimations using the dynamic general method of moment model.

Main findings: The results show that monetary policy instruments in Africa promote higher level of financial development. Also, financial development is stronger in the wake of weak governance systems. However, the interplay between effective governance and effective monetary policy has stronger positive impact on the level of financial development in Africa.

Practical/managerial implications: The study calls for the institution of responsive monetary policies that harness strong institutions to promote financial development.

Contribution/value-add: The article highlights the contributions of strong institutions that stimulate the contribution of monetary policy in effective financial intermediation.