Monetary Policy in Unified Currency Areas
The Cases of the Cama and Ecca During 1976-90

The paper compares the performance of monetary policy in the Central African Monetary Area (CAMA) and the Eastern Caribbean Currency Area (ECCA) during 1976-90. Their institutional setup and mechanism for monetary control are examined to explain the opposite trends in the net external position of their banking system during this period. It concludes that monetary policy in the ECCA succeeded by relying on active interest rate management aimed at stemming capital outflows and adhering to stringent rules aimed at limiting credit expansion. The passive policy stance in the CAMA contributed to a significant redistribution of the area’s money stock.

Abstract

The paper compares the performance of monetary policy in the Central African Monetary Area (CAMA) and the Eastern Caribbean Currency Area (ECCA) during 1976-90. Their institutional setup and mechanism for monetary control are examined to explain the opposite trends in the net external position of their banking system during this period. It concludes that monetary policy in the ECCA succeeded by relying on active interest rate management aimed at stemming capital outflows and adhering to stringent rules aimed at limiting credit expansion. The passive policy stance in the CAMA contributed to a significant redistribution of the area’s money stock.

I. Introduction

In recent years, there has been a renewed interest in unified currency areas (UCAs). A number of countries has envisaged to form such arrangements among themselves or join in one of the few existing UCAs. 2/ Presently, there are discussions about the possibility of setting up a UCA among at least some members of the Commonwealth of Independent States. In principle, countries in a UCA at least agree to have a single currency, institutional arrangements governing monetary policy for the whole area, a common exchange rate policy and thus a common pool of reserves. 3/ Much attention on this topic has been devoted to the advantages and disadvantages for a country to join a UCA versus following an independent exchange rate policy. However, few attempts have been made to compare the effectiveness of monetary policy under alternative regimes of external convertibility in a small UCA under a fixed collective peg. 4/

The present paper makes such an attempt by reviewing and comparing the performance of monetary policy in the Central African Monetary Area (CAMA) and the Eastern Caribbean Currency Area (ECCA) during 1976-90. Members of each of these areas share a single currency issued by a common central bank—the CFA franc issued by the “Banque des Etats de l’Afrique Centrale” (BEAC) and the EC dollar issued by the Eastern Caribbean Central Bank (ECCB), 5/ and operate under a fixed collective peg to the French franc (in the case of the BEAC) and U.S. dollar (in the case of the ECCB). 6/ Two key differences between the CAMA and ECCA motivate the choice of these two areas for the comparative analysis attempted in this paper. First, the CFA franc enjoys external convertibility, unlike the EC dollar. 7/ Second, although the main objective of both the BEAC and the ECCB is to safeguard the common pool of reserves, so as to defend the fixed parity of the collective peg, the behavior of the ratio of net foreign assets of the banking system to broad money differed widely across these two areas during the study period. While between end-1975 and end-1990 this ratio plummeted from 4.4 to -8.7 percent in the CAMA, it jumped from 5.3 to 18.0 percent in the ECCA. The comparative analysis below focusses on the mechanism for monetary control used by the two common central banks to explain these diverging trends, given disparities in the regime of external convertibility of the two common currencies, in the relative size of members between the two areas, in their institutional setup and environment.

The main conclusion is that the ECCB was successful in safeguarding the net foreign position of the banking system because it relied on a more active interest rate policy to correct domestic liquidity imbalances, area-wide and nationwide. In contrast, due in part to a difficult environment complicating greatly its conduct of monetary policy, the BEAC was unable to protect the net foreign position of the CAMA because it followed a rigid interest rate policy, relying primarily on quantitative credit controls to regulate area-wide domestic liquidity. As this instrument proved to be less than effective due to, inter alia, the widespread use of selective credit controls, the monetary policy of the BEAC was essentially accommodating. Evidence suggests that the BEAC’s policy contributed to causing a significant redistribution of the stock of money in favor of Cameroon, its largest member. Only a negligible redistribution took place in the ECCA.

II. The Setting of the Common Monetary Policy

This section discusses the structural and institutional setting of monetary policy in the CAMA and ECCA during 1976-90. 8/ The discussion on the structural setting focuses on financial market integration, regional and international.

1. Financial market integration

The analysis below looks into the degree of financial market integration within the CAMA and ECCA, as well as between each of these currency areas and the rest of the world. Regional integration prevails if the holding and trading of assets issued by residents of each member country are unrestricted within the currency area and leave the relative price of these assets constant. 9/ International integration prevails if the above conditions hold between assets issued inside the currency area and foreign assets. The next subsection summarizes the main provisions in each area on convertibility for capital transactions which is a key determinant of financial market integration, and the subsequent subsection presents statistical evidence on the degree of integration.

a. Convertibility on capital transactions 10/

CAMA countries follow a fairly open regime of currency convertibility on capital transactions. Foreign exchange and payments on capital transactions within the CAMA and with other Franc zone members are generally unrestricted and existing regulations are fairly uniform, both across members and transactions. On capital transactions, CAMA members generally require prior approval from Ministries of Finance for outward transfers to countries outside the Franc Zone (see Table 1). Most inward capital transactions are only subject to declaration. However, CAMA countries apply restrictions on the sale of foreign securities to one another as well as to third countries. Significant restrictions also apply on financial asset holdings. For instance, residents are prohibited from holding foreign currency accounts.

Table 1.

The Regimes of Convertibility on Capital Transactions for CAMA and ECCA Countries, 1989

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Source: IMF, Exchange Arrangements and Exchange Restrictions, 1989.

Consists of the creation/extension of a wholly owned enterprise, subsidiary, or branch; of acquisitions in new or existing enterprises; and of long-term loans with a maturity of five years and longer.

For physical/juridical persons with residence or registered office in Cameroon; or branches and subsidiaries in Cameroon; of juridical persons with offices registered abroad.

Loans not exceeding CFAF 500,000; two years maturity and 6 percent interest rate are exempted from prior approval.

Note: Abbreviations: R = resident; N.R. = nonresident; CIs = credit institutions; DSs = domestic securities; FCM = foreign capital market; FSs = foreign securities; DCM = domestic capital market.

ECCA countries do not follow a uniform regime of convertibility on capital transactions. Each member applies restrictions on these transactions both to other members and nonmembers of the ECCA—though to varying degrees. With no restrictions on foreign exchange as well as payments and transfers of capital transactions, Antigua has the most liberal regime of the area.

b. Degree of financial integration

Statistical evidence suggests that during the period under study (i.e., 1979-90), the CAMA was financially more integrated—both regionally and internationally—than the ECCA. 11/ This evidence is based on inspection of: (i) interest rate differentials—adjusted for nominal effective exchange rate change—between the region’s (as a whole) and foreign markets for international integration, and (ii) disparities in differentials across member countries of a UCA for regional integration.

The degree of international integration is approximated by the variability of the area-wide interest rate differential around its average over the study period. First, this area-wide differential is computed by taking the (unweighted) average of the differential between each member’s national deposit rates—adjusted for yearly changes in its expected effective exchange rate—and the foreign interest rate; its period average is used to measure financial costs associated with trading domestic and foreign financial assets and risks of holding these assets. Second, the variability of the area-wide differential is measured by its standard deviation during the study period; a large (small) standard deviation points to a low (high) degree of integration of region’s market to foreign financial markets. 12/

Statistical results shown in Chart 1 and Table 2 suggest that, during 1979-90, the CAMA was financially more integrated than the ECCA to the world market; its standard deviation was 3.4 percent compared to 6.1 percent for the ECCA [see columns (3)]. Similarly, the financial market of the CAMA was more integrated to the French financial market compared to the ECCA financial market relative to that of the United States (see standard deviations during 1979-90 in column (1)). This result is consistent with the provisions of the Franc Zone Treaty which calls for unrestricted capital movements between France and the CAMA members while no such regulations exist between ECCA members and the United States. However, international integration of the CAMA lessened during 1983-90 compared to 1979-82 (the standard deviation in columns (3) increases). Evidence also suggests that, on average during 1979-90, CAMA and French monetary assets showed a higher degree of substitutability compared to ECCA relative to US monetary assets. The area-wide interest rate differential relative to the standard country was lower for the CAMA compared to the ECCA [Mean; column (1)]. Relative to the world market though, the opposite was true [Mean; column (3)].

Chart 1
Chart 1

Union Average’s Interest Rate Differential; 1979-90

(In percent per annum; period average)

Citation: IMF Working Papers 1994, 011; 10.5089/9781451926002.001.A001

Source: Table 2Notes: 1. LIBOR are is the rate on 3 month deposits in U.S. dollars.2. The Interest rate for the CAMA France, ECCA and US is the rate on 3 month deposelts.
Table 2.

Evolution of Interest Rate Differentials: 1979–90 1/

(In percent per annum, period average)

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Sources: IMF, IFS Yearbook, 1991; countries’ reports; and staff estimates.

Adjusted for exchange rate change in columns (3). These changes consist of the annual rate of depreciation (-) or appreciation (+) of member countries’ nominal effective exchange rate.

Notes:(ī-if)refers to the unweighted area-wide average of the deviations between CAMA members’ deposit rates—in nominal terms—and the 3-month deposit rate in France (see IFS - line 601). This is a measure of financial integration relative to the standard country.
(ī-ius)refers to the unweighted area-wide average of the deviations between ECCA members’ deposit rates and the U.S. rate on certificates of deposits (IFS - line 60 1c).
σrefers to the standard deviation across the region of the differential between members’ deposit rates and the French or U.S. deposit rate (i.e., in the standard country).
(ī-i*-e)refers to the unweighted area-wide average of the deviations between members’ nominal deposit rates and a foreign deposit rate adjusted for annual changes in the members’ effective exchange rate index. The foreign rate used is the LIBOR rate on 3-month U.S. dollar deposit. This variable is a measure of the UCA’s integration to the international financial market.

The degree of intraregional integration is measured by disparities among members’ interest rate differential across in any given period. These disparities are computed by taking the standard deviation of the differential rates across the UCA. In any given period, a low (high) standard deviation points to a high (low) degree of regional integration. Statistical analysis shows mixed results. During 1979-90, and based on members’ differential rate relative to that of the standard country [columns (2)], financial integration was higher in the CAMA than the ECCA, reflecting the uniformity of the exchange regime among the Franc Zone countries (of which CAMA countries and France), unlike ECCA members. From 1979-82 to 1983-90, regional integration experienced a set back both in the ECCA and CAMA as the standard deviation of interest differential rate within the region widened in both CAMA and ECCA. In the CAMA, this situation mirrored the differentiated interest rate policy of the “national monetary” authorities, a policy supported by least financially developed members (e.g., Chad and Central African Republic) and delaying the setting up of a regional money market that would tend to equalize national financial yields. In the ECCA, regional disparities widened despite the setting up of a money market due to: (i) the lack of harmonization of ECCA members’ exchange regimes, and (ii) the administration of the money market rate by the ECCB. 13/

2. The institutional framework for monetary control 14/

The BEAC and ECCB have different institutional framework for monetary control. The common pool is designed differently, although its end purpose is the same, in the two UCAs. Also, decision making is more centralized in the ECCA than the CAMA, owing to the influential role of national authorities in the latter. 15/ Moreover, ECCB’s statutory rules to limit credit expansion are more stringent than the BEAC’s, while discretionary instruments of the ECCB are more flexible than those of the BEAC.

a. Common pool of reserves

Strictly speaking, the BEAC does not manage a common pool of reserves. Rather, the build-up or drawdown of the common pool (le “Fonds Commun de Réserves”) results from the Franc Zone Accords requirement that proceeds from (or payments of) foreign exchange transactions of members’ residents be converted into French francs in the Paris foreign exchange market and that the daily net positive (or negative) balance of these transactions be credited (or debited) to the single account of the BEAC with the French Treasury (“compte d’opération). 16/ 17/ Thus, members with balance of payments deficits have unrestricted access to the common pool.

ECCB requires members to transfer to—or withdraw foreign reserves resulting from their external transactions from—the common pool which it, therefore, manages directly. The pooled reserves are not apportioned among members, and thus, members with balance of payments deficits have also unrestricted access to the common pool.

b. Policy-making authorities

Policy-making bodies are structured rather differently in the two areas. The common governing bodies of the CAMA are the Monetary Committee (MC) and the Board of Directors of the BEAC. Among other responsibilities, the Committee has the power to modify the parity of the common external rate, to admit (or expel) members, and to modify the central bank statutes such decisions require a unanimous vote. Statutorily, the BEAC’s Board of Directors is responsible for formulating monetary policy for the whole area; thus, it sets the discount rates (applicable throughout the region) and approves rediscount ceilings (applicable to individual members). 18/ The weight of members on the Board decisions depends on the size of their representation which reflects the relative size of their economies (see Chart 2 and Table 3). Cameroon, which accounts for half the area’s real GDP and nominal money supply, has four seats on the Board; Gabon, accounting for one fourth of the area’s real GDP and nominal money stock, has two seats; the remaining countries have one seat each. In addition to the common monetary authorities, the CAMA has national “monetary” authorities—the National Monetary Councils—in charge of implementing the policy guidelines of the Board in each member country. Actually, those Councils have a strong influence on the BEAC’s formulation of monetary policy. They also monitor monetary and credit developments in each country.

Chart 2
Chart 2

Member Countries’ Relative Size; 1976-90 1/

(In percent of the area’s aggregate)

Citation: IMF Working Papers 1994, 011; 10.5089/9781451926002.001.A001

Source: IMF, International Financial Statistics Yearbook, 1992; and staff estimates.1/ refers to the annual average share of the areas’ real GDP and broad money over the entire period.
Table 3.

CAMA and ECCA: Indicators of Relative Size of the Unions’ Members, 1976-90

(In percent of the Area’s Broad Money Stock)

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Sources: IMF, International Financial Statistics—Yearbook, 1992.Note:
x¯:arithmetic average over the period
σ:standard deviation
σ/x¯:coefficient of variation.

The common governing bodies of the ECCA are the Monetary Council and the Board of Directors of the ECCB. In addition to making key decisions about membership, exchange rate changes and profit sharing, the Council formulates the common monetary policy. The weight of members on the Board decisions is independent of the economic size of members. Indeed, each country has one seat on the Board of the ECCB. There are no national monetary authorities in the ECCA.

c. Monetary objectives

Both the BEAC and ECCB have, as their main objective, to safeguard the common pool of reserves in order to preserve the parity of the fixed collective peg. 19/ The BEAC formulates its targets, beginning at the national level. Indeed, National monetary authorities (NMCs) determine monetary targets (e.g., foreign reserves; rediscount ceilings), and submit them to the Board for approval. Until the reform of late 1990, the Board had, in practice, accepted the NMC’s proposed monetary targets.

The ECCB formulates monetary aggregate (or area-wide) targets. In recent years, it aimed at maintaining a foreign currency cover equivalent to about 75 percent of its own sight liabilities in order to protect the common pool of reserves. The Monetary Council determines monetary targets (e.g., foreign reserves; rediscount ceilings), and submit them to the Board. An administrative rule is then used to impute common foreign reserves among members. The ECCB is also empowered to set aggregate bank credit ceilings.

The fact that the formulation of monetary policy is decentralized in the CAMA but centralized in the ECCA reflects a major difference in the mandate of the respective central banks: to harmonize members’ monetary policy for the BEAC, but to pursue a common monetary policy for the ECCB.

d. Policy instruments

Both the BEAC and ECCB use statutory rules to promote monetary discipline and discretionary tools to control monetary expansion (Table 4). However, the rules and design of instruments differ markedly, resulting in discretionary monetary control being more limited in the case of the ECCB compared to the BEAC.

Table 4.

BEAC and ECCB: Monetary Policy Instruments during the Study Period

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Official reserves of the common central bank in percent of its right liabilities (defined in footnote 1, p.12).

Selective credits are rediscountable outside these ceilings.

As regards the rules, the BEAC sets a foreign exchange cover and limits on central bank financing of governments. The latter consists of a single limit applied uniformly to all governments. Any modification of this limit requires a revision (none so far) of the BEAC statutes.

As regards discretionary tools, the BEAC had at its disposal, during the study period, rediscount ceilings (main tool) and interest rates. The BEAC set rediscount ceilings for various maturities for each member which, in turn, allocate each ceiling per bank. 20/ However, bank credits for marketing, stockpiling and crop exports were not included in these ceilings, thus providing a source of reserve money expansion outside the control of the BEAC; such credits were rediscounted automatically, and on concessional terms. As regards interest rates, the BEAC set two rediscount rates (a normal and a preferential rate for selective credits; see Table 4) and a basic deposit rate (taux créditeur de base). 21/ These rates applied uniformly to all member countries. Until 1986, the BEAC pursued a rigid interest rate policy, modifying them infrequently. National Credit Councils determined the lending and deposit rates that banks applied to customers by setting margins above the “taux créditeur de base.” These rates were allowed to differ across CAMA countries. Last, though empowered to so, the BEAC had not used reserve requirements as a policy instrument.

The ECCB policy is constrained by stiffer statutory rules than the BEAC. The level of its foreign exchange cover is three times higher than that of the BEAC. 22/ Also, since October 1983, its Board set three statutory limits on its financing of governments; these limits were set at the Board’s discretion, which was authorized to revise them each year, for any or all countries. 23/ These limits accounted for the limited expansion of ECCB credit to governments. 24/

The main discretionary tool of the ECCB is interest rates. It sets: (i) the interest rate it charges banks on its overdraft facilities; (ii) the rate of remuneration it pays banks on their ECCB deposits; and (iii) the “money market” rate. 25/ Upon its Board approval, the ECCB is authorized to differentiate these rates among members if money and credit developments in a particular country warrants it. The ECCB has managed its rate on bankers’ deposits flexibly, keeping it aligned with foreign rates, particularly the LIBOR. Banks are free to determine their lending and nearly all their deposit rates. 26/

The ECCB also used reserve requirements although the required ratio has been not changed since its introduction in 1984. 27/ Finally, though empowered to do so, the ECCB did not use rediscount ceilings, relying instead on moral suasion to implement its credit policy. This has been sufficient, given banks’ little dependence on rediscounts. Banks have relied on the money market to meet eventual refinancing needs.

III. Analysis of the Common Central Banks’ Monetary Policy

This section compares the effectiveness of monetary policy by the BEAC and ECCB in protecting the external position of their respective UCA during 1976-90. It shows that, after its central banking powers were expanded in 1983, the ECCB relied primarily and rather successfully on interest rate management to achieve its external objective. On the contrary, faced with a difficult environment characterized by protracted real as well as monetary shocks, the BEAC relied mostly and unsuccessfully on quantitative credit controls for that same goal. The ECCB’s more stringent statutory rules aimed at limiting central bank financing played a key role in explaining the opposite outcome of the two areas’ foreign banking of the broad money stock. Monetary policies of the BEAC and ECCB, in turn, contributed to a redistribution of the aggregate stock of money in each area towards their largest member(s). While negligible in the ECCA, this redistribution was important in the CAMA. The next subsection reviews and explains the behavior of the foreign backing of broad money during 1976-90. The subsequent subsection focuses on the contributing role of the common monetary policy of the BEAC and ECCB in explaining these trends. The last subsection draws the main implications of the common monetary policies on the redistribution of the aggregate money stock among members of each currency area.

1. Foreign backing of broad money

a. Behavior during 1976-90

The ratio of net foreign assets of the banking system to broad money showed widely diverging trends between the two areas. While the two ratios stood at about 5 percent at end-1975, it plummeted in the CAMA while it jumped in the ECCA, during the second half of the 1980s (Chart 3). With broad money of the CAMA and ECCA averaging about the same annual rate of expansion during 1976-90, the diverging trends of the two UCAs’ ratios were rooted in disparities of: (i) exogenous shocks patterns buffeting their area-wide economies; and (ii) behavior in their area-wide bank credit expansion. The behavior of these determinants is examined below.

Chart 3
Chart 3

Foreign Backing of Broad Money; 1975-90 1/

(In percent)

Citation: IMF Working Papers 1994, 011; 10.5089/9781451926002.001.A001

Source: IMF, International Financial Statistics; and the author’s calculations.1/ Net foreign assets (NFA) of the banking system as a percentage of broad money. These two aggregates (NFA and M2) are the sum of member countries’ NFA and M2.

b. Determinants

CAMA: Oil shocks were the predominant exogenous shocks buffeting the CAMA region. They were protracted and concentrated, in view of the predominant role of the oil sector in the three largest members (Cameroon, Gabon and Congo). Thus, both the cyclical behavior of world oil prices and relative size of members explained the area-wide real GDP growth and inflation, although monetary shocks (e.g., expansionary credit policy) played a major contributing role. Favorable world oil prices during 1976-82 led to a buoyant economic activity as the strong real GDP growth of the largest and oil-producing members more than offset the weak growth in Chad and the Central African Republic (CAR) caused by droughts (Table 5). However, this was accompanied by rapid growth in domestic government spending which fuelled inflation. As area-wide economic activity weakened and the world prices of oil as well as other major export commodities (e.g., coffee and cocoa) fell during 1983-90, fiscal imbalances widened, compelling governments to cut back domestic public spending. Inflation subsequently slowed down.

Table 5.

CAMA and ECCA: Trends in selected Economic Indicators; 1976-90 1/

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Sources: IMF, International Financial statistics. Yearbook 1992; and staff estimates.

Indicators (except for inflation) for the two unions are derived by consolidating national data of union members. Further details are provided in Appendix I.

Using GDP at factor cost (1980 = 100) for ECCA countries.

The unions’ annual rate of inflation, as measured by the CPI, is the unweighted average of national rates of inflation.

Note:

x¯is the arithmetic average of the union annual series over the corresponding period.
σ/x¯is the ratio between the standard deviation over the period and the annual average mean of the corresponding variable.

Despite the cyclical behavior of growth and inflation, area-wide bank credit outpaced nominal GDP growth markedly and steadily during the whole study period. In 1976-82, rapid credit expansion stemmed from the strong demand for private sector credit which was fuelled by negative real interest rates (Chart 4). Thereafter, increased governments’ recourse to bank credit kept the momentum in rapid credit growth as governments went from a net creditor to debtor position vis-à-vis the banking system, while a growing banking crisis entertained a “false” demand for credit from the nongovernment sector. Bank credit expansion exerted strong pressures on broad money expansion which was partly offset by substantial foreign reserves losses. Thus, the cyclical pattern of the oil shocks and excess bank credit expansion influenced largely the behavior of the foreign backing ratio.

Chart 4
Chart 4

Areawide (Unweighted) Lending Rate of the CAMA and ECCA; 1979-90

(In percent per annum; period average)

Citation: IMF Working Papers 1994, 011; 10.5089/9781451926002.001.A001

Source: Statistical Appendix Table 2 & 3.

ECCA: Real domestic shocks which were the predominant shocks buffeting the ECCA tended to average out over time during 1976-82 and across members thereafter. During 1976-82, natural disasters hit all Islands every other year, causing area-wide real growth to go from slump to recovery although the region averaged a strong annual real growth. Inflation followed the same pattern, rising sharply as natural disaster increased scarcity of basic commodities and put strong upward pressures on domestic prices, and declining afterwards. 28/ In 1983-90, exogenous shocks (e.g., slump in tourism) tended to be localized in one member country in a given year, and thus to average out across the region which, as a whole, continued to display strong real economic growth, which was more stable that during the first sub-period. 29/

Area-wide bank credit and nominal GDP averaged about the same growth during 1976-90 as credit expansion originated mostly from private sector credit and was closely related to economic activity and members’ lending rate behavior. 30/ During 1976-92, for instance, banks curtailed private sector credit in construction and tourism when economic activity declined and their liquidity position became tight. 31/ As competition among banks became stiffer (e.g., Antigua) beginning 1983, prime lending rates fell and stimulated bank credit expansion and economic growth. Expansionary pressures on broad money from bank credit were more than offset by massive inflows of concessional financial assistance during 1976-82 and by large exports receipts due to buoyant traditional exports and tourism in 1983-90, thus improving the foreign backing ratio accordingly.

2. Monetary control

Both the stance and mechanism for monetary control of the BEAC and ECCB determined the behavior of domestic bank credit expansion and, as a result, of the foreign backing ratios of the CAMA and ECCA, although the BEAC’s conduct of monetary policy was greatly complicated by a difficult environment. The analysis below shows that excess money and credit expansion in the CAMA stemmed largely from reserve money growth because of the ineffectiveness of the BEAC’s quantitative credit controls mechanism, a lack of coordination between monetary and fiscal policy, and growing banking distress. In contrast, money and credit expansion in the ECCA reflected primarily the growth of the money multiplier, and thus banks’ behavior which the ECCB influenced via its active interest rate policy, after its central banking powers were expanded (Chart 5).

Chart 5
Chart 5

Sources of Broad Money Expansion; 1976-90

(Annual change; In percent of M2 at the beginning of period)

Citation: IMF Working Papers 1994, 011; 10.5089/9781451926002.001.A001

Source: IMF, International Financial Statistics Yearbook, 1992; and staff estimates.Note: DH, DM, DH, M show, respectively, the percentage increase in broad money due to an increase in the monetary base, the money multipiler, and the interaction between the preceding two.

a. BEAC

Net domestic credit of the BEAC was largely demand-determined during 1976-90 and thus contributed to the excessive domestic credit expansion by the banking system. 32/ A key problem lay in the design and operation of the rediscount facility. Indeed, rediscount of selective credits was open-ended, which reduced the fraction of rediscount under BEAC’s direct control; furthermore, the BEAC did not control the remaining fraction of rediscount (of the “crédits plafonnés”) since it set too high individual bank ceilings on these rediscounts, leaving access at the initiative of banks; finally, and particularly before 1986, the BEAC administered rediscount rates rigidly, keeping them well below the French money rate.

A second problem was the non-enforcement of prudential ratios (ratios de liquidité) that were also used to limit credit expansion. 33/ This situation arose mainly because the BEAC had limited banking supervision powers. 34/ In turn, the situation led to the growth of banks’ bad loan portfolio and the erosion of public confidence in the banking system, with both factors in turn complicating BEAC’s reserve money managment. 35/

A third problem linked to the coordination with fiscal policy arose from mounting fiscal deficits and the ensuing deterioration of governments’ net position vis-à-vis the BEAC both of which complicated reserve money management substantially. Until 1983, governments held a net creditor position because of the large deposits of the oil producing members; afterwards, as fiscal pressures mounted because of an economic downturn and slump in world oil prices, BEAC credits to governments rose rapidly, with their growth rate doubling—on an annual average basis—in 1983-90 compared to 1976-82. Thus, given the smallness and openness of the region’s economy under a fixed exchange regime, central bank—and thus bank—credit expansion led to large net foreign reserves losses for the region as a whole, pointing to some degree of endogeneity of the broad money stock.

The model of the monetary approach to the balance of payments in developing countries developed by Connolly and Taylor (1976) was used to test these assertions and the effectiveness of monetary policy of the BEAC in protecting the area’s foreign exchange position and the collective fixed peg during the 1979/II-1990/IV period. 36/ Empirical results provide limited support for the endogeneity of the CAMA money stock and thus, to the workings of the automatic balance of payments adjustment mechanism during the study period (Table 6). Although the “offset” coefficient of the CAMA was statistically significant, its magnitude (-0.47) was well below—and statistically different from—minus unity. 37/ This indicated that an acceleration in bank credit in the CAMA as a whole led to a less proportionate deterioration of the area’s balance of payments in a one-quarter period. 38/ Also, increased nominal exchange rate depreciations (estimated coefficient of -0.59) improved the balance of payments within one quarter, although not as much as expected (slightly more than a one-to-one improvement in the balance of payments). 39/ Based on this mixed evidence, the hypothesis that a monetary transfer from the standard country is necessary to preserve a fixed collective parity cannot be rejected in the case of the CAMA. 40/ This is so especially in view of the sharp erosion of the foreign backing of the CAMA money stock in the second half of the 1980s. Evidence for such transfers is reflected in the rise of the ratio of the CAMA money stock relative to that of the French money stock rose during 1978-85.

Table 6.

CAMA: Results of OLS Estimation of Monetary Model; 1979/II - 1990/IV 1/

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Using deseasonalized data. The dependent variable Δ (B/M-1) is the quarterly improvement in the balance of payments (approximated here by the quarterly increase in net foreign assets of the banking, in percent of broad money at the beginning of period. Independent variables are the change in the (unweighted) average nominal effective exchange rate (A eef); the increase in bank credit expansion in percent of broad money at the beginning of period (ΔΔD(M1)); and the change in the differential between the BEAC discount rate and the French money market rate.

Used to test the stability of estimated coefficients, assuming a break point in 1983/III. The computed F-statistics (reported) were not statistically significant; we thus failed to reject the hypothesis of stability of estimated coefficients.

Note:The hypothesis that the estimated “offset” coefficients equalled minus one was tested. The computed F-statistics were 17.2 for the CAMA, /2.2 for Cameroon, 1.02 for the Congo and 2.59 for Gabon. Given the critical F_ value of 2.61 (with 4 degrees of freedom in the numerator and 36 degrees of freedom in the denominator), the hypothesis was rejected for the CAMA and Cameroon, but could not be rejected for Congo and Gabon.

b. ECCB

Before its central banking powers were expanded in 1983, the ECCB had limited discretion to influence banks’ behavior outside the use of moral suasion. After it began remunerating bankers’ deposits in the last quarter of 1982, the ECCB embarked on an active interest rate policy to protect the common of pool of reserves only in early 1984. To that end, it adjusted regularly—though with a lag at times—the interest rate at which it remunerated bankers’ deposits so as to keep it aligned with foreign interest rates (the LIBOR and US interest rates). This policy enabled the ECCB to prevent bank capital outflows throughout most of the 1983-90 sub-period and, consequently, to build up net foreign reserves substantially. These observations about the behavior and effectiveness of the ECCB policy were tested, using the Connolly-Taylor model which was modified to include changes in the differential between domestic and foreign interest rates as a determinant of the improvement of the balance of payments.

Results for the whole study period show that the ECCB’s move toward an active interest rate policy in 1983 played a significant role in strengthening the area’s external position (the hypothesis about a structural break in the estimated relationship in 1983 could not be rejected; Table 7). Thus, the Connolly-Taylor model (excluding the effect of the interest policy) was estimated for the sub-period up to early 1983 and the 1983-90 sub-period.

Table 7.

ECCA: Results of OLS Estimation of The Monetary Market Model; 1979/IV-1990/IV 1/

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Based on deseasonalized money and credit aggregates, derived by regressing seasonal dummy variable on original quarterly data and taking the residuals as deseasonalized series. The estimated relationships are specified as follows. The dependent variable is the improvement in the balance of payments which is defined as the first difference in the quarterly change in net foreign assets of the banking system (an approximation of the overall balance of payments), in percent of broad money at the beginning of the period. Independent variables are: (i) the quarterly changes in the unweighted average nominal effective exchange rate of the region as a whole (A eef); a depreciation (-) of the exchange rate is expected to improve the balance of payments and thus, the coefficient ~1 is expected to have a negative sign; (ii) the acceleration in the rate of domestic credit expansion by the banking system which is expressed as the change in outstanding credit of the banking system in percentage of broad money at the beginning of the period (its impact measures the offset coefficient); and (iii) the reduction in the differential interest rate (against the domestic economy) which is expected to have a positive effect on the balance of payments. All equations were estimated using either the LIBOR rate as three-month US deposits or the three-month U.S. treasury-bill rate and only the best results are reported.

Used to test the stability of estimated coefficient over two periods. The break point for the whole period is 1983/1 (announcement of the setting up of ECCB with full-fledged central banking powers) for ECCA; 1983/IV (when ECCB began operating effectively) for Grenada and St. Lucia; and 1986/1 (when they money market was set up). An asterisk indicates that the computed F-statistic was higher than the critical value at a 95 percent interval confidence level, and thus, that the hypotheses of stability of estimated coefficients was rejected.

The interest rate differential is measured relative to the three-month U.S. treasury bill. Results based on the LIBOR were poor and thus, not reported.

Notes:1.Data in parenthesis are the t-ratios. An asterisk on the estimated coefficients indicates that the computed t-ratio was higher than the critical value of the t-statistics at a 95 percent interval confidence level, and thus that the coefficient was statistically significant.
2.The variances and standard errors of the estimated coefficients are heteroskedastic-consistent estimates.

Results for the first sub-period show that increased bank credit expansion had no statistically significant effect on the improvement of the balance of payments, reflecting mainly the conservative lending policy of banks during this period. However, increased depreciations of the nominal effective exchange rate contributed to improving the area-wide balance of payments. Results for the second sub-period (1983/IV-1990/IV) show that the interest rate policy of the ECCB was effective in protecting the net foreign reserves position of the ECCA. The increase in the differential between domestic and foreign interest rates (in favor of the region) led to a higher-than-proportionate improvement of the region’s balance of payments within one quarter, pointing to the high interest-rate elasticity of the demand for financial assets in the region. In carrying out its interest rate policy, the ECCB seemed to be guided more by the interest rate differential relative to the three-month US treasury bill than the LIBOR rate on three-month deposits in US dollars. That could be expected, due to the close integration of the region’s financial market to that of the United States in the 1980s. Statistical results based on the Treasury rate generally turned out better that those using the LIBOR rates. Furthermore, interest rate adjustments more than offset the effect of excess credit expansion on the balance of payments of the region (the “offset” coefficient was -0.19) and thus strengthened the external position of the region during the period spanning from mid-1983 to 1990.

3. Redistribution of monies

a. Overview

During the whole period under study, in the two areas the broad money stock was redistributed towards the largest countries; this redistribution was much larger in the CAMA than the ECCA. 41/ In the CAMA, the redistribution took place largely from Gabon to Cameroon as their monetary shares (in percent of the area’s broad money stock) moved in opposite directions and were highly negatively correlated (r = -0.97; Table 8). On an annual average basis, Cameroon’s share jumped by 8 percentage points between 1976-82 and 1983-90 while that of Gabon plummeted by nearly the same magnitude between the two sub-periods. Results of the statistical analysis below point to the neutralization of Cameroon reserve losses as a factor contributing to this redistribution of monies.

Table 8.

CAMA and ECCA: Coefficients of Correlation of Selected Members’ Monetary shares: 1976-90 1/

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Monetary shares are calculated as the ratio of the country’s broad money stock, (in percent of the area-wide stock of broad money calculated as the sum of members’ broad money stock).

In the ECCA, a small redistribution of the region’s broad money stock took place mainly from Grenada to Antigua and St. Lucia. Grenada’s monetary share was negatively correlated with that of St. Lucia (r = -0.66). The latter’s share rose by only 2 percentage points only between the two sub-periods, while that of Grenada fell by 4 percentage points. This redistribution reflected largely the responsiveness of banks in member countries to the ECCB common interest rate policy, although credit expansion played a key role in Grenada. Statistical evidence (below) suggests that the redistribution of monies in the ECCA operated largely through the capital account. The mechanism of redistribution of monies in the two regions is examined below.

b. Within the CAMA

Cameroon and Gabon’s monetary shares moved in opposite directions. This reflected diverging trends in their money and credit expansion relative to that of the CAMA as a whole (Table 9). On average during the 1979-90 period, Cameroon inflated at a faster pace and Gabon at a slower pace than the CAMA region as a whole. As a result, Cameroon’s monetary share rose and Gabon’s fell. The key issue was whether this diverging trend was induced by BEAC policy or reflected money demand factors.

Table 9.

CAMA and ECCA: Selected Economic Indicators of Selected Members, 1976-90

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Net domestic credit of the banking system, in percent of broad money at the beginning of period.

Evidence suggests that Gabon’s monetary growth was demand-determined. Indeed, due to the net creditor position of Government vis-à-vis the banking system during 1976-82, total bank credit expanded at a pace slightly above nominal GDP growth but below money growth, causing a foreign reserve build-up. 42/ In 1983-90, however, Gabon suffered massive losses of net foreign reserves due to private residents’ placements abroad (equivalent to one-third of its money stock at end-1990) from end-1982 to end-1990, and plummeting world commodity prices. Persistent rumors of an exchange rate adjustment and the banking crisis contributed to capital flight. Official reserves losses offset monetary growth due to an expansionary credit policy and caused a decline in its monetary share. Results of the estimation of the Connolly-Taylor model indicate that Gabon’s monetary share was endogenous and, thus, that monetary expansion was demand-determined. The hypothesis that its “offset” coefficient was minus one was not rejected; this supported the assertion about Gabon’s foreign reserves build-up during the first sub-period, and thus to its contribution to the pool of reserves. In contrast, Cameroon’s monetary share rose in both sub-periods (1976-82 and 1983-90). During the first sub-period, domestic credit outpaced nominal GDP growth substantially, exerting expansionary pressures on broad money which were offset by foreign reserve losses. However, its share rose, pointing to a monetary transfer from the common pool of reserves. During the second one, and mostly after the reversal in the world commodity markets, particularly the oil market, Cameroon’s domestic credit expansion continued to exceed nominal GDP growth, causing foreign reserves losses. Nevertheless, its share continued to rise, pointing this time to a monetary transfer from abroad. The Connolly-Taylor model results support these observations and show that Cameroon’s monetary share was not endogenous and that the automatic balance of payments adjustment mechanism did not operate fully during the 1980s; indeed, its “offset” coefficient was well below—and statistically different—minus unity (-0.48). Therefore, evidence suggests that Cameroon money stock was insulated from foreign reserves losses; this insulation was possible owing mainly to monetary transfers to Cameroon from the common pool.

c. Within the ECCA

During 1976-90, domestic bank credit in St. Lucia expanded at about the same average annual rate as nominal GDP but at a slower pace in Grenada. However, monetary expansion outpaced credit expansion by 2 and 1 percentage points per annum in St. Lucia and Grenada, respectively, reflecting St. Lucia’s stronger foreign reserves build-up, and thus, stronger balance of payments performance. Results of the estimation of the Connolly-Taylor model showed that, during the 1980s, St. Lucia’s balance of payments improved mainly in response to the increase in the interest rate differential (in favor of the ECCA) and to the increased depreciation of its nominal effective exchange rate. However, statistical tests rejected the hypothesis of the stability of the estimated coefficients for the two countries during the 1979/11-1990/IV period. That suggests structural breaks in the estimated relationships both in the last quarter of 1983 and the first quarter of 1986.

Until 1983, the decline in exports receipts due to low traditional exports and weak economic activity caused the erosion of the foreign backing of the ECCA as well as those of St. Lucia and, particularly, Grenada. Nominal effective exchange rate depreciations in St. Lucia mitigated the impact of exogenous shocks (hurricanes) on its balance of payments, and enabled St. Lucia’s monetary share to remain roughly constant while Grenada’s declined.

From late 1983 to 1990, St. Lucia’s balance of payments improved mainly in response to the closing of the interest rate differential relative to the Libor rate. However, during 1987-1988, the ECCB closed the differential with a one-quarter lag, causing some capital outflows. Outside that sub-period (1987-88), the ECCB adjusted promptly its rate on bankers’ deposits to changes in the LIBOR rate and, thus, succeeded to keep the differential between these two rates, positive (in favor of ECCA countries). Therefore, St. Lucia was able to attract net capital inflows and build up its foreign reserves position substantially, leading its monetary expansion to outpace that of the ECCA region as a whole and thus causing its monetary share to rise.

During this 1983-90 sub-period, Grenada’s balance of payments improved also in response to these differential interest rate movements, although this improvement was partly offset by an expansionary credit policy during 1986-90. Indeed, reflecting the realignment of domestic interest rates with foreign rates in 1984-85, Grenada improved its balance of payments position and restored the foreign backing of its broad money stock. In 1986-90, however, the positive effect of interest rate on the balance of payments was partly offset by excess domestic credit—arising mostly from credit to government in reflection of budgetary pressures. Consequently, foreign reserves accumulation slowed down, causing a moderate increase in monetary growth rate. As result, during the whole study period, the broad money stock of Grenada rose at a slower pace than that of the ECCA region as a whole, leading its monetary share to fall.

V. Conclusion

The paper set forth to compare the conduct of monetary policy by the BEAC and ECCB during 1976-88. The two common central banks relied on different mechanism for monetary control to protect foreign reserves and thus, defend the fixed parity of the collective external peg. The main conclusion is that, due to disparities in their institutional and structural setup, the ECCB and BEAC achieved opposite results with regards to controlling the area’s domestic credit and thus preserving the area-wide external position. From 1976-82 to 1983-90, the ECCB strengthened the net foreign reserve position of the banking system by pursuing a flexible interest rate policy aimed at preventing capital outflows outside the region. This led to a redistribution of monetary allocations in the ECCA based on members’ balance of payments performance and operating largely through their capital account.

In contrast, from 1976-82 to 1983-90, the BEAC was unable to protect net foreign reserves of the banking system. Although real exogenous shocks (e.g., plunge in world price of oil, coffee, cocoa, drought) buffeting the region’s economies greatly complicated BEAC’s monetary management, the inefficiency of the BEAC’s system of monetary control, combined with capital flight due to the erosion of public confidence in banks and with the lack of coordination of fiscal and monetary policy, accounted largely for the massive losses of foreign reserves. In particular, the inadequate design and use of rediscounting—the main monetary control instrument of the BEAC—precluded the BEAC from tightening domestic credit expansion when necessary. Moreover, the BEAC pursued a rigid interest rate policy which led to significant capital outflows, particularly from Gabon, as public confidence in banks weakened and rumors of an exchange rate adjustment spread. Thus, exogenous shocks were transmitted to net foreign reserves both through the current and capital accounts. Due to the BEAC’s accommodating policy, a redistribution of monies towards Cameroon occurred. Evidence based on the magnitude of the estimated “offset” coefficient of Cameroon suggests that BEAC contributed to this redistribution by neutralizing Cameroon’s net foreign reserves losses. Results of the empirical analysis here are based on quarterly effects of interest rate and credit policy. Results for the ECCA support the hypothesis of a speedy external adjustment process when the central bank relies in interest rate management. However, further empirical work would be useful to investigate the pattern and speed of the adjustment process for UCAs, such as the CAMA, which rely on quantitative credit controls as the main tool of monetary policy. Indeed, different speeds of adjustment among members may put different strains of the common pool of reserves, complicating short-term monetary management substantially.

Appendix I

Unified Currency Areas Among Small Countries

(As of December 1990)

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L’Union du Magreb Arabe.

Appendix II

Table 1.

Institutional Arrangements of the CAMA and ECCA; 1990

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Gross official reserves of the common central banks, in percent of liability base defined in the respective columns.

Note:CAMA:Central African Monetary Area
ECCA:Eastern Caribbean Currency Area

Bibliography

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1/

An early version of this paper was submitted at the Central Banking Department’s seminar held in Washington during November-December 1990. The author wishes to thank Messrs. Sundararajan, François, Baliño, and Mueller, and Ms. Fisher for comments on the earlier drafts, and Messrs. Makonnen and Qureshi for their valuable research assistance. The paper was prepared while the author was in the Monetary and Exchange Affairs Department.

3/

See: Allen, Organization and Administration of a Monetary Union, Princeton Studies in International Finance, No. 38, 1976; Corden, Monetary Integration, Essays in International Finance, No. 93, April 1972.

4/

For analytical treatment, see R.P. Allen and Kenen, Asset Markets, Exchange Rates and Economic Integration: Chapter 16, Cambridge University Press, Cambridge, 1980; R.P. Allen “Policies to Correct Cyclical Imbalances in a Monetary Union”, Journal of Common Market Studies, Vol. 21, No. 3, 1983; and S.W. Ardnt, “Joint Balance: Capital Mobility and the Monetary System of a Currency Area” in the Economics of Common Currencies, edited by H.G. Johnson and A.K. Swoboda, Harvard University Press, Cambridge, 1973; and P.R. Allen (1983).

5/

The ECCB became a full-fledged central bank on October 1, 1983 when it replaced the East Caribbean Currency Authority. The main functions of the latter institution were to issue the common currency—the EC dollar—and to manage the common pool of reserves.

6/

The exchange rate of the two common currencies are CFAF 50 per FF, and EC$2.7 per US$, respectively. During 1965-75, the EC$ was pegged to the British pound.

7/

Article 2 of the Treaty between the CAMA members and France states that this cooperation is based on the unlimited guarantee provided by France to the CFA franc and on deposits of members’ foreign reserve assets with the French Treasury [see B. Vinay (1980)]. The focus in this paper is on the institutional arrangements governing monetary cooperation among the CAMA countries, which are in turn members of a wider monetary arrangement: the CFA Franc Zone. For a description of the institutional setup of the Franc Zone, see J.M. Boughton (1991).

8/

Institutional changes have taken place in the CAMA in late 1990 and thereafter (e.g., unification of the refinancing rates; creation of a banking commission in charge of bank supervision in the CAMA region, etc.). However, these changes are not the focus of this study which examines the 1976-90 period. Also, the analysis and consolidated data for the CAMA and ECCA exclude Equatorial Guinea and Montserrat from the respective regions; for Equatorial Guinea, owing to the late adherence in the CAMA (1985); for Montserrat, owing to the lack of sufficient data covering the study period.

9/

Even with restrictions on capital transactions, regional integration still prevails if assets issued in member countries are highly substitutable for the common currency, and are thus liquid and marketable through the currency area. See Allen (1976), Op. cit.

10/

The majority of countries of the CAMA and ECCA do not apply exchange controls on current transactions, although they all maintain trade restrictions on current transactions. The subsequent discussion on currency convertibility refers only to foreign capital transactions.

11/

Interest rate data before 1979 were not available for CAMA members. The study period was thus shortened to 1979-90 in order to carry out a comparative analysis of integration of the two regions.

12/

Participants in the foreign exchange market are assumed to form their expectations rationally, implying that changes in the expected and actual effective exchange rates are equal.

13/

However, the ECCB intermediates all offers of, and demands for interbanks funds in this market.

14/

Appendix II summarizes the institutional framework of the two currency areas.

15/

ECCB acquired powers to supervise banks, to regulate their monetary operations and to provide credit to governments in October 1983. Previously, its central banking functions were limited to currency issuance and management of the common stock of reserves. In addition to the latter two functions, the BEAC is empowered to extend credits to governments and act as their fiscal agent.

17/

BEAC can hold 35 percent of its holdings in foreign currency other than the French franc.

18/

The practice is different as regards the setting of rediscount ceilings [see par. 2. (c)].

19/

In addition, the ECCB Is called upon to assist economic development of member countries. The BEAC is not assigned such objective which falls under the purview of national monetary authorities.

20/

These rediscount credit ceilings were applied to the “crédits plafonnés.” Once the BEAC sets them by individual bank, the National Monetary Councils set sub-ceilings, per enterprise, within each individual bank rediscount ceiling.

21/

The BEAC also sets a preferential rate on statutory advances to governments and two penalty rates applied to banks and the Treasury, respectively. In October 1990, however, the Board eliminated the preferential rate and unified the above refinancing rates. For the first time, the Governor was also empowered to set the rediscount and penalty rates.

22/

The base of the cover consists of sight liabilities which include currency in circulation and other sight deposits of the area’s banks with the common central bank.

23/

During the study period, the Board had not made any such revision.

24/

The annual increase in ECCB credit to government averaged 6 percent of reserve money (at the beginning of the period) during 1976-88. Reserve money expansion averaged annually 14 percent.

25/

The ECCB created an interbank “market” facility in February 1986 to allow surplus banks to place excess funds with deficit banks in the region. All bank members of the Clearing House operated by the ECCB are eligible to participate in the “market.” The ECCB acts as the broker by accepting banks’ deposits in current account and on lending the funds to other banks for a commission of 0.5 percent above the money market rate of 5 percent per annum. Borrowing banks are required to provide acceptable paper (e.g., treasury bill or private paper) as collateral.

26/

The ECCB has, however, set a minimum interest rate for savings deposits at 4 percent. Banks are required to publicize their interest rates.

27/

Reserves are not remunerated.

28/

During 1976-77, the economic slump stemmed from uncertainty in the economic climate following the shift from a sterling pound to a U.S. dollar peg. During 1978/79, economic activity recovered due to a boom in agricultural output and tourism. During 1979-1980, two hurricanes (David and Allen) depressed the economies of all Islands; this situation was exacerbated by floods in Grenada (1979), a volcanic eruption in St. Vincent and weak tourism activity in all islands. During 1981-82, the region recovered as tourism activity resumed and construction boomed as hotel damaged by the two hurricanes were repaired.

29/

In 1983 for instance, economic activity declined in Grenada and St. Lucia due to a slump in construction but boomed in St. Vincent and Antigua due to a strong growth of the tourism sector.

30/

Factors such as liquidity position of banks and lending limits set by head office of foreign banks also effected private sector credit expansion.

31/

Banks assigned a higher credit risk to loans in these sectors compared to commercial loans.

32/

During the 1980s, the growing deterioration of the financial soundness of banks in the area added pressures on banks’ demand for rediscount credits.

33/

These ratios were dismantled in 1989. The BEAC has since redesigned these ratios which are to be enforced by a newly created regional banking commission in charge of banking supervision in the CAMA.

34/

Among others, enforcement of supervisory policy was the responsibility of national authorities, during the period of study.

35/

The weakening of banks’ loan portfolio originated largely in public enterprises’ growing difficulties to service bank debt after the plunge in commodity export prices, and problems inside the banking sector (e.g., management problems).

36/

The model specifies an improvement in the balance of payments in terms of a change in the depreciation of the exchange rate (positive sign) and the growth rate of bank credit expansion (negative sign). The magnitude of estimated coefficients provides a test of the monetary approach to the balance of payments. An estimated coefficient of minus one for the credit variable suggests that changes in the balance of payments reflects an adjustment of money supply to its desired level, and thus that money supply is endogenous. The estimated coefficient of the exchange rate variable should be greater than one if permanent income is growing (see Connolly and Taylor (1976)).

Note:

The balance of payments and bank credit expansion are respectively expressed as changes in the net foreign reserves and in net domestic credit of the banking system in percent of the stock of money. In this paper, the latter is chosen at the beginning of the period.

37/

This hypothesis was tested, using a F-test for linear restriction and was rejected at a 95 percent interval confidence level.

38/

In comparison, the estimated coefficient found by Connolly and Taylor (though in cross-section analysis) was -0.82 for credit expansion over a two-year period. Estimation of the Connolly-Taylor model in a dynamic specification—assuming a Kyock lag distribution—did not provide any meaningful evidence of a slow adjustment process at work for the CAMA, nor for two of Its largest member countries (Cameroon Congo and Gabon); indeed, the estimated speed of adjustment coefficient (the estimated coefficient of the lagged dependent variable minus one) was either not statistically significant or had the wrong sign (negative). It cannot however be excluded that the poor results of the model specified in a dynamic form points to a more complicated adjustment process than assumed under a Kyock distribution lag rather than a adjustment within one quarter. This issue, which is not the main focus of the paper, points to the usefulness for further econometric analysis.

39/

These movements of the region’s average (unweighted) nominal effective exchange rate movements arise from fluctuations between major currencies relative to the French franc and of trade outside the Franc zone rather than policy actions.

40/

Macedo (1986) reached a similar conclusion for the West African Monetary Union.

41/

See Table 3 showing the annual average monetary share of ECCA and CAMA member-countries in 1976-82 and 1983-90.

42/

Gabon built up a large net creditor position vis-à-vis the banking system during the first half of the 1980s.

Monetary Policy in Unified Currency Areas: The Cases of the Cama and Ecca During 1976-90
Author: Mr. Jean-Claude Nascimento
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    Union Average’s Interest Rate Differential; 1979-90

    (In percent per annum; period average)

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    Member Countries’ Relative Size; 1976-90 1/

    (In percent of the area’s aggregate)

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    Foreign Backing of Broad Money; 1975-90 1/

    (In percent)

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    Areawide (Unweighted) Lending Rate of the CAMA and ECCA; 1979-90

    (In percent per annum; period average)

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    Sources of Broad Money Expansion; 1976-90

    (Annual change; In percent of M2 at the beginning of period)