Monetary Condition Index and Its Relation With Other Macroeconomic Variables: An Empirical Study in Selected Mena Countries

This article aims to construct a monetary condition index (MCI) for five countries in the MENA region, namely Algeria, Bahrain, Egypt, Jordan, and Morocco, in order to interpret the stance of monetary policy in these countries. A broad MCI has been constructed by combining two transmission channels of monetary policy, the real interest rate and the real effective exchange rate, along with bank credit to the private sector. These three indicators of the monetary conditions are collected for these countries over the period 1995–2020 for all countries except for Bahrain, which has data from 1995 to 2015. Principal component analysis (PCA) is used to construct the monetary condition index (MCI). Then a vector auto-regression method is employed to explore the impulse response of MCI to consumer price index (CPI) and GDP. The results reveal that the MCI of Bahrain, Egypt, and Jordan can predict inflation and economic growth in the long run but cannot do that in the short run. However, in the cases of Algeria and Morocco, the findings show that MCI cannot predict inflation and GDP in the short and long run.