Essays on monetary policy

This dissertation contains topics in monetary policy and is composed of two independent essays. The first essay focuses on optimal monetary policy for aid-dependent low-income countries with fiscal indiscipline. We captured the characteristics of a non- resource-rich low-income economy with a high dependency on foreign aid using a simplified DSGE model. We limited our analysis to the case where the aid-related revenues are fully spent by the fiscal authority, a scenario referred to as fiscal indiscipline. On the other hand, to establish the optimal policy regime, the monetary authority has the latitude to choose the following: monetary targeting, fixed exchange rate and price targeting regimes. The simulation results show that increased foreign aid inflows cause the Dutch disease effect in the recipient economy evident in the shrinking tradable sector and real appreciation of the exchange rate. Importantly, if the monetary authority pursues a monetary targeting framework, it can limit the Dutch disease effect by cushioning welfare and growth. Even when the fiscal authority is indiscipline and foreign aid is fully absorbed, monetary targeting outperformed both price targeting and fixed exchange rate regimes. The second study investigated the bank lending channel of monetary policy transmission in The Gambia from the period 1998Q1 to 2020Q4. The study used an SVAR and PSVAR as well as BVAR for robustness check to perform the analysis. The findings suggest that there is a partially active bank lending channel in The Gambia. Moreover, there is heterogeneity among major economic sectors in their response to monetary policy shocks.