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Title: The effect of external shocks on macroeconomic performance and monetary policy in a small open economy: evidence from Zambia

Authors: Patrick Mumbi Chileshe; Keegan Chisha; Masauso Ngulube

Addresses: Economics Department, Bank of Zambia, P.O. Box 30080, Bank Square-Lusaka, Zambia ' Economics Department, Bank of Zambia, P.O. Box 30080, Bank Square-Lusaka, Zambia ' Economics Department, Bank of Zambia, P.O. Box 30080, Bank Square-Lusaka, Zambia

Abstract: This study investigates the impact of external shocks on domestic macroeconomic variables and monetary policy of a small open economy, Zambia using a structural VAR estimated with quarterly data covering the period Q1 2000 to Q1 2016. Results indicate that monetary policy is pro-cyclical in response to external shocks, while the dominant external shocks are commodity price shocks followed by financial shocks. This implies that external shocks are clear determinants of monetary policy direction in Zambia owing to their effect on key macroeconomic variable. In addition, results from impulse responses indicate that external shocks have significant effects on Zambia's macroeconomic performance. Specifically, commodity price shocks have significant effects on output and exchange rate while financial shocks have significant effects on prices and exchange rate.

Keywords: external shocks; monetary policy; SVAR; monetary aggregate targeting; inflation targeting; impulse response function; forecast error variance decomposition; FEVD.

DOI: 10.1504/IJSE.2018.088621

International Journal of Sustainable Economy, 2018 Vol.10 No.1, pp.18 - 40

Available online: 30 Nov 2017 *

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