Monetary Policy Effectiveness under the CEMAC area: an Empirical Evaluation

Abstract

In this paper, we evaluate the effectiveness of monetary policy under the Central African Economic and Monetary Union. In 1990, the central bank of this currency union operated an important shift in its monetary policy strategy with the implementation of a Monetary Programming. With the final objective of monetary stability, the central bank of the union has adopted instruments that are more market oriented than the previous one. We use a gradual methodology based on a vector auto regression approach. Specifically, we begin by estimating the usual three-variable model which includes the real GDP, the consumer price index and the policy interest rate. This basic model is then extended in order to examine the interest rate channel and the bank lending channel. We find that there are too many differences among the CEMAC countries on the effects of the common monetary policy. This outcome reflects the difficulties encountered by the central bank to implement a common monetary policy in the region. Our results also show that the traditional interest rate channel is not effective enough in the CEMAC area. Moreover, if there is some evidence of a bank lending channel in this region, we are inconclusive on this issue due to the well-known identification problem that arise with the use of aggregate data. Therefore, we argue that further studies are necessary in order to shed more light on the bank lending channel issue.
Keywords: Bank lending channel, CEMAC, Monetary policy effectiveness, Vector error correction model.