MONETARY POLICY TRANSMISSION MECHANISMS IN A SMALL OPEN ECONOMY: CASE OF MOROCCO

As a small open economy subject to shocks, Morocco is facing challenges in the conduct of its monetary policy. Understanding the effects of monetary policy and the channels through which it is transmitted is critical to its successful conduct. This paper has attempted to understand the monetary transmission mechanism in Morocco. We have estimated an identified VAR using the standard recursiveness assumption as the identification technique and we have calculated the Impulse Responses Functions and Forecast Error Variance Decomposition of the main variables following a monetary policy shock. The model indicates that an unexpected monetary policy tightening (corresponding to 1% interest rate rise) implies (i) a gradual and persistent fall in the real GDP which reflects the relative high sensitivity of the investment to interest rate shifts, (ii) a gradual and persistent slight decrease of the core consumer price index and credits to private sector and (iii) a gradual appreciation of the Nominal Effective Exchange Rate. The results suggest that the interest rate, credits and exchange rate channels are operative in the Moroccan economy