Monetary autonomy in the West African countries: What do the policy rules tell us?

Abstract

This paper provides an empirical assessment about how the monetary policy has been made in a group of Sub-Saharan African countries that are members of the CFA Franc zone. We question the argument that being a member of the CFA zone has always implied the loss of monetary policy autonomy. We use two definitions of monetary autonomy. In a first sense, we consider the African central bank's' ability to set their policy instruments endogenously, in regard to the local economic situations prevailing in the CFA zone, and not only in accordance with the monetary policy followed by the anchor zone. In a second sense, we interpret autonomy in a narrow sense, meaning that money creation is backed by the inflow of foreign exchange reserves as is usually the case for a currency board. These two definitions are used alternatively to test the hypothesis of monetary autonomy through the estimations of an interest rate and credit growth rules. We focus our attention on the West African Economic and Monetary Union (WAEMU) countries, where the upholding of the CFA zone is today passionately debated among the economists. Our results suggest a mixed evidence of autonomy. On the one hand, by considering the interest rate instrument, we provide some evidence that the BCEAO did not completely import its interest rate policy from France and the Euro zone, up until the 1994 devaluation. In addition to the Bank of France's discount rate and the inflation differential with Europe, the domestic interest rate has also been fixed in regard to variables such as growth, the real exchange rate and changes in foreign reserves. Until 1994, there seems however to be strong signs of loss of autonomy. On the other hand, we examine the responsiveness of credit planning to changes in foreign reserves and conclude against the hypothesis of autonomy over the whole period. Even more, credit policy has become more restrictive since the 1994 devaluation. Copyright © 2009 John Wiley & Sons, Ltd.