Threshold Cointegration Approach for Assessing the Impact of US Economic Policy Uncertainty on Monetary Policy Decision of African Countries

Abstract

This study uses threshold cointegration technique to ascertain the relationship between United States (US) economic policy uncertainty (EPU) and monetary policy rate (MPR) of each of the four African countries, namely Egypt, Ghana, Namibia and South Africa using monthly data from March 1998 to April 2020. The impact of US EPU on MPR of each country is assessed by examining the linear cointegration, asymmetric cointegration and causal relationships in the frequency domain between the US EPU and MPR of each African country. The findings provide evidence of long-run threshold cointegration and the adjustment mechanisms towards long-run equilibrium are asymmetric in the short run for the MPR models for Ghana, Namibia and South Africa in the M-TAR specification except for Egypt’s MPR model which does not provide evidence of asymmetric adjustment towards the equilibrium position. The bivariate analysis performed in the spectral frequency domain suggests unidirectional causality between US EPU and MPR of each country and that, the US EPU influences the MPR of each country in the long run. The findings provide important guidelines to monetary policy reviewers to take policy stance that would stimulate economic growth amid US policy uncertainties.