Robust Optimal Monetary Policy in a Forward Looking Structural Vector Autoregression Model for the Kingdom of Eswatini

Abstract

The purpose of the study was to establish the optimal monetary policy to influence inflation, credit extension to the private sector, and real GDP in the right direction in the Kingdom of Eswatini. Based on the three estimated models of the Structural Vector Autoregressive (SVAR) using monthly data for the period 2000 to 2019, the results indicate that the discount rate is optimal/ superior over the reserve requirement and liquidity requirement. Monetary policy shocks to the reserve requirement and liquidity requirement are not effective to stimulate economic growth and bank credit to the private sector, which indicates that the three instruments do not complement each other. The results of the variance decomposition show that the discount rate’s contribution is 0.62% on real GDP, 3.25% on inflation, and 3.31% on bank credit in month twenty-four, which is significant. The study also recommends that the Central Bank of Eswatini should consider a policy mix of 5.60% for the discount rate, 4.30% for the reserve requirement, 13.29% for the liquidity requirement to influence inflation, bank credit to the private sector and economic growth in the right direction.