Morocco’s Monetary Policy Transmission in the Wake of the COVID-19 Pandemic

WP/21/249 Morocco’s Monetary Policy Transmission in the Wake of the COVID-19 Pandemic by Maximilien Queyranne, Dániel Baksa, Vassili Bazinas, and Azhin Abdulkarim IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2021 International Monetary Fund WP/21/249 IMF Working Paper Middle East and Central Asia Department Morocco’s Monetary Policy Transmission in the Wake of the COVID-19 Pandemic Prepared by Maximilien Queyranne, Dániel Baksa, Vassili Bazinas, and Azhin Abdulkarim1 Authorized for distribution by Roberto Cardarelli October 2021 Abstract This paper finds that the neutral interest rate has been on a downward trajectory in Morocco since the global financial crisis and may have fallen in the wake of the pandemic. In that context, monetary policy transmission to output and prices appears relatively muted given limited exchange rate flexibility until recently. Also, monetary policy transmission to some market rates has somewhat weakened in the wake of the pandemic. A lower natural rate and low policy rates raise the question of whether further rate reductions would impair the banking system. We find that the sensitivity of cash demand to deposit rates is low, implying limited risks that banks would lose funding with further reductions. A reliance on checking and savings accounts for funding may impair monetary pass-through, however. If monetary policy reaches its effective lower bound, limited and credible recourse to an asset purchase program could usefully complement conventional measures and strengthen monetary policy transmission under an inflation-targeting regime with a flexible exchange rate. JEL Classification Numbers: E4, E5 Keywords: Monetary policy, neutral interest rate, unconventional monetary policy. Author’s E-Mail Address: mqueyranne@imf.org; vbazinas@imf.org; dbaksa2@imf.org 1 The authors thank Roberto Cardarelli, Jose Antonio Ferrer Catalan (all MCD), Romain Veyrune, Romain Lafarguette, Luis Brandao Marques (all MCM), and Aleš Buliř (ICD) for very useful advice and comments. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 Contents Abstract ......................................................................................................................................1 Glossary .....................................................................................................................................3 Introduction ................................................................................................................................4 I. Assessing Morocco’s Space for Conventional Monetary Policy ...........................................5 A. Estimating the Neutral Interest Rate in Morocco ......................................................5 B. Gauging Monetary Policy Transmission in Morocco .............................................11 II. Modeling the Impact of an Asset Purchase Program in Morocco .......................................22 III. Conclusions ........................................................................................................................26 Tables Table 1. Taylor Rule Regression .............................................................................................13 Table 2. Effect of Monetary Policy tightening on Output and Prices ......................................14 Table 3. Estimates of the Demand of Banknotes in Morocco .................................................19 Figures Figure 1. Results of the Trend-Cycle Decomposition and Small Semi-Structural Model .........9 Figure 2. Impulse Responses of Output and Prices to A Monetary Policy Shock ...................15 Figure 3. Monetary Policy Transmission to the Government Yield Curve .............................16 Figure 4. Monetary Policy Transmission to Lending rates ......................................................17 Figure 5. Monetary Policy Transmission to Deposit Rates .....................................................21 Figure 6. Share of total bank liabilities ....................................................................................21 Figure 7. Interest Rate Margin on Retail Operations ...............................................................22 Figure 8. Impact of a downside scenario (solid lines) and an Asset Purchase ........................25 Appendices Appendix I. A Semi-Structural Model with Monetary and Fiscal Policy for Morocco. .........27 Appendix II. Variables Definition and Sources ..............................................