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I would like to thank my colleagues in the African department for their assistance in collecting the background data for this study, and David T. Coe, Paulo Neuhaus, Jose Fajgenbaum, and others for their support. I also would like to thank Bernard Laurens for his comments and Thomas Walter for editorial support. The nsual disclaimer applies.
Before the introduction of the euro in January 1999, these African countries pegged to the French franc.
Among the 18 African countries that have negotiated arrangements under the IMF’s Poverty Reduction and Growth Facility (PRGF), 8 have fixed exchange rate regimes.
This information was provided by IMF economists and supplemented with information from other sources, including International Financial Statistics and the Annual Report on Exchange Arrangements and Exchange Restrictions.
Define the central bank’s monetary liabilities as the sum of currency outside deposit money banks and banks’ required and excess deposits with the central bank (C+RR+ER), and broad money as the sum of currency in circulation and deposit liabilities of banks (C+D). Then the money multiplier can be defined as mm = (C/D+l)/(C/D+rr+ER/D), which depends in part on the reserve ratio rr = RR/D.
The case for this argument is substantially weaker when close substitutes for bank deposits are available, which is not typical in sub-Saharan Africa.
Inflation targeting tries to overcome this problem by replacing the quantitative monetary target (e.g., reserve or broad money) with an inflation forecast as an intermediate monetary policy target.
For reference, see Ize (1995) and Marston (1996). In this section, we mainly focus on those sub-Saharan African countries where foreign-currency deposits represent a substantial portion of banks’ total deposits.
We abstract from differentiation with respect to maturity in this section.
Only a small portion of reserve balances are remunerated at the central bank’s benchmark interest rate.
Open position limits could constrain the extent to which banks can offset a shortfall in the local currency liquidity by selling foreign currencies.