Sub-Saharan Africa: Is Monetary Policy the Miracle Cure for Financial Stability?

In pursuit of the sustainable development goals (SDGs), the emphasis is on implementing effective monetary policies that prioritise domestic credit quality and the money supply. This particular objective has been extensively researched, giving rise to a large literature on the subject. In this paper, our objective is to analyse the impact of monetary policy, in particular domestic credit and money supply, on financial stability in 48 sub-Saharan African countries from 2000 to 2021. To achieve this, we use a variety of analytical methods, including ordinary least squares (OLS), the Driscoll–Kraay method, which has been shown to be robust using the Lewbel 2SLS method, the Kinkyreg method, the method of generalized moments in system (MMG-S) and the quantile method. Through these analyses, we aim to uncover the relationship between monetary policy and financial stability in sub-Saharan Africa. Our results reveal a positive correlation between monetary policy, domestic credit and money supply with financial stability in sub-Saharan African countries. It should be noted that this positive effect persists both inside and outside the franc zone, although it is more pronounced inside the franc zone. Based on these results, we propose that monetary and government authorities in sub-Saharan African countries take proactive steps to intervene in the banking sector through subsidies. Such interventions have the potential to improve the overall welfare of financial institutions and contribute to the stability of the banking system as a whole.