Front Matter Page
African Department
Authorized for distribution by I. Diogo
Contents
I. Introduction
II. Institutional Background in the WAEMU
1. Money Demand and Fixed Exchange Rates
2. The Impact of Liberalization on Monetary Policy
III. Empirical Analysis
1. The Choice of Variables
2. The Data
3. Estimation Results
4. Stability of the Money Demand Function
a. Parameter stability
b. Forecast performance
c. The impact of the devaluation
5. Forecasting M2 for 1997
6. Summary of Empirical Findings
IV. Conclusions
Appendix
References
Tables
1. Money Demand Equations, 1973-1996
2. Autoregressive Specifications, 1973-1996
3. Root Mean Squared Forecast Errors
4. Money Demand Equations, 1973-1993
Charts
1. Graphs of Variables
2. Regression 1
3. Regression 2
4. M2 ‒ Actual and Fitted Values
Summary
Regional monetary integration, financial liberalization, and the adoption of indirect policy instruments continue to change the conditions for monetary policy in the West African Economic and Monetary Union (WAEMU). Regional integration requires the monetary authorities to shift their focus from national to regional macroeconomic relationships, while financial liberalization and the adoption of indirect instruments introduce market forces to the regional financial markets and make the impact of changes in monetary policy more difficult to predict.
Given the specific monetary environment — a fixed exchange rate with France and a low degree of capital movements with countries outside the region — the BCEAO (Banque Centrale des Etats de l’Afrique de l’Ouest) requires accurate information on the effects of macroeconomic changes on the demand for money. This paper presents empirical money demand estimations for regional monetary aggregates including an analysis of their stability and forecast performance. A relationship between real narrow money (M1) and a number of explanatory variables remains stable over time and yields accurate forecasts. For the sum of fixed term and savings deposits (Mt) there is also a stable relationship, however, with inferior forecast properties. Estimates of the sum of these two variables, M2, on the other hand, do not result in statistically viable equations.
The conclusion is that, despite the change in the monetary environment, the BCEAO can maintain its ability to conduct monetary policy in line with the requirements of the fixed exchange rate system if it strengthens the effectiveness of its indirect instruments and succeeds in maintaining financial stability in the region.