Uncovering Asymmetries in Monetary Policy Transmission in the Economic Community of West African States: Dynamic Heterogeneous Panel Analysis

Abstract

ABSTRACT As the Economic Community of West African States (ECOWAS) gravitates toward establishing a monetary union, characterized by a common central bank and a single currency, the eco, there is need for deeper knowledge of the monetary policy transmission mechanism to ensure the effective conduct of a common monetary policy in the region. This study investigates the existence of potential asymmetries in the transmission of monetary policy impulses and the implications for monetary policy effectiveness under a unified framework. It employs the dynamic heterogeneous structural panel vector autoregressive (VAR) modeling technique developed by Pedroni (2013), which allows for heterogeneous country-specific dynamics and accommodates cross-sectional dependencies. Based on quarterly data covering the period 1994–2016, the findings reveal statistically insignificant responses of real gross domestic product (GDP) and inflation in member countries to a common monetary policy shock, though the country-specific responses exhibit some asymmetries. The panel estimates for the region also do not produce statistically significant responses to the unanticipated monetary policy shock. In addition, the results indicate that the two plausible monetary transmission channels—the bank lending channel and the exchange rate channel—are either weak or inoperable at the level of ECOWAS and that could undermine the effective conduct of a common monetary policy within the proposed monetary union. Policy should, therefore, be directed at enhancing the transmission of monetary policy impulses in the region, including through far-reaching financial sector reforms, modernization of monetary policy frameworks, and the comprehensive harmonization of institutional and operational mechanisms of monetary policy across member countries.