A Vector AutoRegressive (VAR) Approach to the Credit Channel for the Monetary Transmission Mechanism in Mauritius

Abstract

This paper is an attempt to determine the presence and empirical significance of monetary policy and the bank lending view of the credit channel for Mauritius, which is particularly relevant at these times. A vector autoregressive (VAR) model of order three is used to examine the monetary transmission mechanism using quarterly data from 1985Q1 to 2006Q4. The variables Gross Domestic Product (GDP), price level, money supply and credit to private sector are considered. The results of econometric analysis
show the effectiveness and relevance of monetary policy and of a credit channel in the short-run. Changes in the monetary policy variable (M2) affect the credit variable (CPS) in the short-run. Output (GDP) increases temporarily, while the effect of a monetary stimulus on prices is a persistent increase.

Keywords: Monetary Transmission Mechanism, Credit Channel, VAR
model.