Effectiveness of the Interest Rate Channel of Monetary Policy Transmission Mechanism in Sierra Leone

The study investigated the effectiveness of the interest rate channel of monetary policy transmission to domestic price level in Sierra Leone using data from February 2011 to June 2022. Two VAR models are employed to analyze the relationship between the lending rate and credit to the private sector, exchange rate, money supply, and consumer price index. The results indicate that a one standard deviation shock to lending rates does not significantly affect credit to the private sector, suggesting that the lending rate channel has minimal impact. The impact of the lending rate on the exchange rate is also insignificant. However, the impact of the monetary policy rate on the lending rate is significant. Thus, while monetary policy rate is effectively transmitted to the lending rate, the lending rate does not effectively transmit to other monetary variables of interest, including credit to the private sector and the price level, implying that the role of the monetary policy rate in Sierra Leone is quite limited. Thus, there is a need for structural changes, including building financial inclusion to reduce the role of cash transactions.