The Econometrics of Factor Loadings and Implications for Monetary Policy in a Small Open Economy (2005- 2020) – Sierra Leone

Öz

In this paper, the authors explored the interaction of macroeconomic variables with some form of vague interrelationships. The relevance of factor analysis has demonstrated an existing association between manifest and latent variables in helping the researchers come out with informed and justified suggestions that are relevant to inform effective policy decisions for the central bank action in Sierra Leone. We examine the relationships among some significant manifest and latent variables in a small open economy (Sierra Leone) using time series data spanning from 2005 to 2020. Both international crude oil prices and the local currency in circulation were found to be loadable under two factors (domestic and external), while the exchange rate was observed to be loaded under the external factor. The outcome also proved that the effects of domestic and international economic shocks (sudden but temporarily disrupted) converged (dissipated) after six to eight months. The paper concludes that innovation and energy diversification are important for domestic and external stability in a small open economy.

Anahtar Kelimeler

• Bayesian Analysis
• Economic Shocks
• Exchange Rate
• Factor Loadings
• Manifest and Latent Variables

Kaynakça

1. Bangura, M., Caulker, E., & Pessima, S. (2012). Exchange rate pass-through to inflation in Sierra Leone: A structural vector autoregressive approach. Journal of Monetary and Economic Integration, 12(1), 93-123. google scholar
2. Bernanke, B. S. (1986). Alternative Explanations of the Money-Income Correlation. Carnegie-Rochester Conference Series on Public Policy. Autumn, 25, 49-99. google scholar
3. Bernanke, B.S., Boivin, J., & Eliasz, P. (2005). Measuring the effect of monetary policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach. The Quarterly Journal ofEconomics, 120(1), 387-422. https://doi. org/10.1162/0033553053327452. google scholar
4. Blanchard, O. J., & Mark W. Watson, M.W. (1986). Are business cycles all alike? In The American Business Cycle: Continuity and Change. R.J. Gordon, Ed. Chicago: University of Chicago Press. google scholar
5. BSL. (2019). The Bank Act of 2019. Retrieve from http://www.bsl.gov.sl/The%20%20Banking%20Act%202019. pdf. google scholar
6. Connor, G., & Korajczyk, R. (1986). Performance measurement with the arbitrage pricing theory: a new framework for analysis. Journal ofFinancial Economics, 15, 373-394. google scholar
7. Connor, G., & Korajczyk, R. (1988). Risk and return in an equilibrium APT. Journal of Financial Economics, 21, 255-289. google scholar
8. Connor, G., & Korajczyk, R. (1993). A test for the number of factors in an approximate factor model. Journal of Financial Economics, 48, 1263-1292. google scholar

9. Conti, G., Fruhwirth-Schnatter, S., Heckman, J.J. & Piatek, R. (2014). Bayesian exploratory factor analysis. Journal of Econometrics, 183(1), 31-57. google scholar
10. De Gregorio, J. (2012). Commodity Prices, Monetary Policy, and Inflation. IMF Econ Rev, 60, 600-633. https://doi. org/10.1057/imfer.2012.15. google scholar
11. Geyer, C.J. (2011). Introduction to Markov Chain Monte Carlo. In S. Brooks, A. Gelman, G. Jones, & X-L. Meng (Eds.), Handbook of Markov Chain Monte Carlo (3-48). CRC Press. google scholar
12. Hawkesby, C., Marsh, I.W., & Stevens, I. (2007). Comovements in the equity prices of large complex financial institutions. Journal of Financial Stability, 2, 391-411. google scholar
13. Jackson, E.A., Tamuke, E., & Sillah, A. (2018). Is there a J-Curve effect in Sierra Leone? An empirical analysis with VECM. Modern Economy Journal, 12(10), 1486-1518. https://doi.org/10.4236/me.2021.1210076. google scholar
14. Jackson, E.A., Jabbie, M., Tamuke, E. & Ngombu, A. (2020). Adoption of inflation targeting in Sierra Leone: Empirical discourse. Journal of Economic Policy Researches, 7(2), 1-32. https://doi.org/10.26650/ JEPR735604. google scholar
15. Jackson, E.A., Tamuke, E., & Jabbie, M. (2019). Dynamic effect of inflation shocks in Sierra Leone: An empirical analysis. Journal ofAdvanced Studies in Finance, 10(2), 73-91. https://doi.org/10.14505/jasf.v10.2(20).01. google scholar
16. Jackson, E.A. (2016). Phronesis and Resource Curse Hypothesis in Post-Independent Sierra Leone. Ilorin Journal ofEconomic Policy, 3(1), 1-10. google scholar
17. Jeffreys, H. (1961). Theory ofprobability, (3rd ed.). Oxford: Oxford University Press. google scholar
18. Kapetanios, G., Mumtaz, H., Stevens, I., & Theodoridis, K. (2012). Assessing the economy-wide effects of quantitative easing. The Economic Journal, 122(564), F316-F347. https://doi.org/10.1111/j.1468-0297.2012.02555.x. google scholar
19. Kass, R.E., & Raftery, A.E. (1995). Bayes Factors. Journal of the American Statistical Association, 90(430), 773795. google scholar
20. Lynch, S.M. (2007). Introduction to Applied Bayesian Statistics and Estimation for Social Scientists. Princeton, NJ: Springer. google scholar
21. Nazlioglu S., Gormus A., & Soytas U., (2019). Oil prices and monetary policy in emerging markets-structural shifts in causal linkages, Emerging Markets Finance and Trade, 55:1, 105-117. https://doi.org/10.1080/154049 6X.2018.1434072. google scholar
22. Roll, R., & Ross, S.A. (1980). An empirical investigation of the arbitrage pricing theory. The Journal of Finance, 35, 1073. https://doi.org/10.1111/j.1540-6261.1980.tb02197.x google scholar
23. Sims, C.A. (1980). Macroeconomics and Reality. Econometrica, 48(1), 1-48. google scholar
24. Spicer, J. (2005). Making sense of multivariate data analysis. California: Sage. google scholar
25. Stevens, J.P. (2002). Applied multivariate statistics for the social sciences (4th ed.). Hillside, NJ: Lawrence Erlbaum. google scholar
26. Stock, J.H. & Watson, M.W. (2001). Vector Autoregressions. Journal ofEconomic Perspectives, 15(4), 101-115. google scholar
27. Tamuke, E., Jackson, E.A. & Sillah, A. (2018). Forecasting inflation in Sierra Leone using ARIMA and ARIMAX: A Comparative Evaluation. Theoretical and Practical Research in the Economic Fields, 9(1), 63-74. google scholar
28. Warburton, C. E., & Jackson, E. A. (2020). Monetary policy responses to exogenous perturbations: The Case of a small open economy (2007-2018). PSL Quarterly Review, 73(293), 181-201. https://doi.org/10.13133/2037-3643_73.293_5. google scholar
29. World Bank Poverty Reduction & Economic Management Unit (2014). Fuel Prices in Sierra Leone. Washington DC: World Bank. google scholar
30. Zaidi, S.A.H., Hussain, M., & Uz Zaman, O. (2021). Dynamic linkages between financial inclusion and carbon emissions: Evidence from selected OECD countries. Resources, Environment and Sustainability, 4(100022). https://doi.org/10.1016/j.resenv.2021.100022. google scholar