Macro-financial linkage, endogenous risk premium and monetary policy: evidence from a semi-structural model estimated for Morocco

Abstract

Purpose

This paper seeks to investigate the amplitude of macro-financial linkage for an emerging country like Morocco.

Design/methodology/approach

For this purpose, it presents a semi-structural new-Keynesian model. In the blocks of the former, a risk premium is charged on the lending rate in addition to the policy rate. To identify the macro-financial linkage, the risk premium is considered endogenous. It is represented as a function of the borrower’s probability of default, which is, in turn, a function of the GDP gap. To identify this two-wave relationship, we estimate an ARDL model between 2009Q1 and 2020Q1. Therefore, we integrate the estimation results into the new-Keynesian semi-structural model.

Findings

The results reveal a significant impact of the financial condition on the path of the business cycle. In fact, demand shocks and nonperforming loan shocks (NPLs) are exacerbated by the presence of macro-financial linkage. Under this condition, the amplitude and persistence of the shocks are amplified and extended.

Originality/value

This paper extends the literature on the interconnection between the real and financial economies by considering the endogeneity of the credit risk premium and modeling its dynamics.

Citation

Achmakou, L. and Hachimi Alaoui, M.E.-H. (2024), "Macro-financial linkage, endogenous risk premium and monetary policy: evidence from a semi-structural model estimated for Morocco", African Journal of Economic and Management Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/AJEMS-04-2024-0273