The effectiveness of monetary policy channels in achieving the objectives of magic square: An econometric analysis on Yemen economy

The aim of this study is to analyze the impact of monetary policy channels on economic growth, unemployment rate, inflation rate and current account, which constitute the magic square approach in Yemen during the 1990-2016 period. In this context, the impact of money supply channel, interest rate channel, exchange rate channel and bank loan channel on four economic variables are analyzed using the VAR approach. The VAR analysis revealed that the monetary channel, the exchange rate channel and the interest rate channel are effective on economic growth and inflation, but the bank credit channel is not effective on economic growth and inflation. On the other hand, only the interest rate channel has a weak effect on unemployment, while other monetary policy channels have no effect on unemployment. Lastly, it has been determined that the monetary channel and the exchange rate channel have an effect on current account, while the interest rate channel and the bank loan channel do not have a significant effect on current account. Consequently, it has been concluded that the monetary channel and the exchange rate channel are the most effective channels in transmission of monetary policy decisions to the real economy in Yemen.