Effectiveness of exchange rate channel in transiting monetary policy impact to real economy: the case of Yemen

Hilmi Özkaya M., Alhuwesh M.

Journal of Sustainable Finance and Investment, vol.13, no.1, pp.104-117, 2023 (ESCI) identifier

  • Publication Type: Article / Article
  • Volume: 13 Issue: 1
  • Publication Date: 2023
  • Doi Number: 10.1080/20430795.2021.1886549
  • Journal Name: Journal of Sustainable Finance and Investment
  • Journal Indexes: Emerging Sources Citation Index (ESCI), Scopus
  • Page Numbers: pp.104-117
  • Keywords: Exchange rate channel, monetary transmission mechanism, vector auto regression model, Yemeni economy
  • Uşak University Affiliated: Yes

Abstract

This study aims to investigate the effectiveness of the exchange rate channel as a monetary transmission mechanism in Yemen, using technique of the Vector Autoregression (VAR) model and its help tools, such as impulse reaction function analysis and variance decomposition analysis in 1991–2018. The results of the study were compatible with theoretical expectations for the exchange rate (EXR) impact on the net exports (NX), the real economic growth (RGDP), and the inflation rate (CPI). Consequently, the exchange rate channel plays an important role in transferring the impact of monetary policy decisions to RGDP and the CPI in Yemeni economy. Our study has shown the effectiveness of the exchange rate channel in influencing both RGDP and CPI, due to the large role that the exchange rate plays in influencing economic activity in Yemen since the Yemeni economy is highly open to other economies.