Abstract
This article aims to highlight the nonlinearity of the reaction function of the Central Bank of West African States (BCEAO) through financial stability. Using the smooth threshold autoregressive (STAR) model on aggregate data for the period 1970–2020, the study reveals that the dynamics of the BCEAO monetary policy are conditioned on financial stability, especially when using the money supply ratio as an indicator of financial stability. Thus, the BCEAO reacts to a financial instability risk when the volatility of the latter exceeds a threshold. In particular, the BCEAO adopts a restrictive monetary policy by raising its interest rate when the deviation of the financial stability index is greater than the estimated threshold. These results indicate that the BCEAO should take into account the cyclical component of the money supply ratio in conducting monetary policy. This strategy could prevent financial instability risks.
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