Do changes in monetary policy affect inflation and output in the East African Community (EAC)? We find that (i) Monetary Transmission Mechanism (MTM) tends to be generally weak when using standard statistical inferences, but somewhat strong when using non-standard inference methods; (ii) when MTM is present, the precise transmission channels and their importance differ across countries; and (iii) reserve money and the policy rate, two frequently used instruments of monetary policy, sometimes move in directions that exert offsetting expansionary and contractionary effects on inflation—posing challenges to harmonization of monetary policies across the EAC and transition to a future East African Monetary Union. The paper offers some suggestions for strengthening the MTM in the EAC.

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This note studies the inflation-uncertainty relationship in a New Keynesian framework. Inflation in these models can be expressed as the discounted sum of current and expected future real marginal costs. The main point of this note is to highlight that real marginal costs in general equilibrium tend to be a convex function of output. This, ceteris paribus, makes higher uncertainty about future output increase current inflation, which can quantitatively off-set the deflationary effect of uncertainty via the precautionary savings channel (Basu and Bundick, 2017).