Unemployment and monetary policy: Evidence from Sub‐Saharan Africa

• Published date: 01 February 2022
• Author: Abayomi T. Onanuga,Olawunmi Omitogun
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2382

ACADEMIC PAPER

Unemployment and monetary policy: Evidence from

Sub-Saharan Africa

Abayomi T. Onanuga | Olawunmi Omitogun

Department of Economics, Olabisi Onabanjo

University, Ogun State, Nigeria

Correspondence

Author: Abayomi T. Onanuga, Department of

Economics, Olabisi Onabanjo University, Ogun

State, Nigeria.

Email: onanuga.toyin@oouagoiwoye.edu.ng;

abonanuga@yahoo.com

In Sub-Sahara Africa, few studies have been conducted on how unemployment

affects monetary policy in each country. Even an aggregate study of the phenome-

non in Sub-Sahara Africa is near absent despite a high level of unemployment in the

region. To investigate the empirical link between unemployment and monetary pol-

icy, the study employs a sample of 37 countries in Sub-Sahara Africa for the period

2011–2017. Data were obtained from the World Bank and International Monetary

Fund database. Using the difference Generalized Method of Moments model, the

study determines how monetary policy (using the lending rate as proxy) responds to

unemployment, employer's condition and total labour force in Sub-Sahara Africa. We

found that monetary policy indirectly responds to employer's condition, but the posi-

tive effect of the total labour force on monetary policy is relatively higher than total

unemployment as a percentage of the labour force in the region. The study concludes

that a linkage exists between monetary policy and employment indicators in Sub-

Sahara Africa and therefore, made some policy recommendations.

JEL CLASSIFICATION

E24; J21; E43; E58; J64

1|INTRODUCTION

Without gainsaying, one of the primary objectives of monetary policy is

to maintain a low level of inflation that is stable. In attaining this vital role,

many advanced countries and a relatively less number of developing

countries have adopted inflation targeting since the 1990s with the view

that such policy is favourably disposed to the reduction of inflation rate

in their respective countries (Tatliyer, 2017). However, the challenges of

unemployment coupled with the attendant social problems are one of

the major reasons for the thinking on how to improve employment

opportunities in Africa. Because of this and even in advanced economies

issues have been raised on how monetary policy can contribute to the

creation of sustainable employment. For example, in Africa where finan-

cial markets are still evolving, positive monetary policy changes in money

growth for developing small- and medium-scale enterprises (SMSEs) can

improve economic activity and eventually job opportunities.

In calibrating the optimal monetary policy rate based on rules,

Jung (2011) argues that indicators such as financial market frictions

should be taken into consideration. While Faia and Rossi (2012)

explain that unemployment should be considered as one of the target

variables in a rule-based monetary policy. Despite the call by some

economists for the consideration of other economic variables in

determining monetary policy rate after the 2007–2009 world financial

crisis, economic theory has also emplaced how monetary policy

affects aggregate variables heterogeneously.

The new classical theory avers that monetary policy only affects

long-run inflation, but the neo-Keynesian theory posits that mone-

tary policy affects inflation, unemployment and real wages while

post-Keynesian emphasises its effect on growth (Palley, 2007).

These theoretical expositions point to the fact that monetary policy

has heterogeneous effects on the aggregate variables but with

divergent effects on different economies. While this study does not

intend to investigate the range of different theoretical submissions

of how monetary policy affects the macroeconomy in Sub-Sahara

Africa (SSA), the main focus of the study is to investigate the link

between monetary policy and some labour market indicators such

Received: 28 May 2020 Revised: 30 July 2020 Accepted: 9 August 2020

DOI: 10.1002/pa.2382

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https://doi.org/10.1002/pa.2382