4.7. INTERPRETATION OF THE
RESULTS
Considering the one period lagged value of the monetary stock
aggregate (M1), one observes that one unit change in the previous
period monetary stock aggregate results in about 0.99 units change in the
current monetary stock aggregate, holding other variables the same. This means
that, the increase of previous monetary stock aggregate by 1unit, current
monetary stock aggregate will increase by 0.99 units, so there is positive
relationship between the previous and the current monetary stock aggregate.
Considering the current and the one period lagged inflation
gap: It is noticed that for a given change in the one period lagged deviation
of the inflation from its target, the monetary stock aggregate reacts by a
change of about 1.49 units to current inflation gap and by a change of about
2.8 units to one period lagged inflation gap. This means that, if inflation
were 1unit point above its target, the Central Bank would increase the monetary
stock aggregate by 1.49 in terms of reaction against current inflation gap,
holding other things the same. Regarding the current period of inflation gap,
the coefficient 1.49 can be interpreted as the change in the value of monetary
stock aggregate following a unit change in current inflation gap in the same
period and same sense. If inflation were 1 point above its target, the Central
Bank would increase the monetary stock aggregate by 2.8 in terms of reaction
against previous inflation gap, holding other things the same. Regarding the
one year lagged period of inflation gap, the coefficient 2.8 can be interpreted
as the change in the value of monetary stock aggregate following a unit change
in previous inflation gap in the same period and same sense.
Considering the output, the results show that the Central Bank
of Rwanda reacts to 1unit change in the current output gap by a change of 0.54
units in the monetary stock aggregate inversely, and by a change of 0.09 units
in the monetary stock aggregate positively, holding other things the same.
Considering the exchange rate, the results show that the
Central Bank of Rwanda reacts to 1unit change in the current exchange rate by a
change of 0.08 in the monetary stock aggregate inversely and previous exchange
rate by 0.31 in the monetary stock aggregate inversely holding other things the
same.
When looking at the results more closely with the objective of
highlighting the variable that has influenced monetary policy decisions over
the period of study, it is apparent that the monetary authorities were mainly
concerned with the exchange rate. This is relevant given the importance of the
exchange rate in a small, open, and developing country especially Rwanda, in
the present case. Indeed, as noted previously, the exchange rate policy in
Rwanda aims at approaching a balanced level of the exchange rate, to stabilize
prices, to ensure a support for the growth and to connect Rwanda's foreign
exchange market to the international market. These objectives are pursued under
a controlled flexible policy regime, that is, the exchange rate can fluctuate
from day to day but the Central Bank attempts to influence the exchange rate by
buying and selling currencies in the foreign exchange market. The impact of
such interventions is to affect the monetary base. According to this fact, the
exchange rate considerations play a great role in the conduct of monetary
policy and this has been shown through the estimation results.
Given the fact that Rwanda has a strong dependence on
assistance from multilateral financial institutions which in its turn has a
real impact on the balance of payment, apparently, the importance of reacting
to exchange rates seems to be relevant in Rwanda since it could limit the
pressure exerted on the Rwanda currency in order to meet international prices
and the debt service management. In addition, these findings about the exchange
rate influence on monetary policy are consistent with the state of the Rwanda's
economy from 1995 when it started to benefit from financial assistance from
international institutions in the context of the Enhanced Structural Adjustment
Facility (ESAF) and the Poverty Reduction and Growth Facility (PRGF). This may
lead one to think that changes in the flow of international assistance could
contribute to the significant changes in official reserves for the country.
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