Factors Influencing Changes in Money Supply in BCEAO Countries
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

THE PURPOSE OF THIS PAPER is to examine the changes in money supply during the period 1962–68 in the seven African countries (Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta) that have a common central bank, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), with a view to determining the relative importance of the various factors causing such changes. For this purpose, the causal factors are divided into “behavioral” and “nonbehavioral.” The former are identified as (1) the ratio (c) of currency to money and (2) the ratio (r) of cash reserves held by the commercial banks to demand deposits. The nonbehavioral factors considered are (1) changes in net foreign assets (Δ F), (2) changes in credit to the government (Δ DG), and (3) policy-induced changes in monetary liabilities (Δ Lp) of the Central Bank. If Δ F and Δ DG are considered autonomous (i.e., outside the control of the Central Bank), then changes in Lp may be properly ascribed to policies of the Central Bank. The relative influence of changes in Lp on money supply (M), compared with that of behavioral and other nonbehavioral factors, should provide an indication of the relative influence of monetary policy on money supply in each of the member countries of the BCEAO as well as in the currency area as a whole.

Abstract

THE PURPOSE OF THIS PAPER is to examine the changes in money supply during the period 1962–68 in the seven African countries (Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta) that have a common central bank, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), with a view to determining the relative importance of the various factors causing such changes. For this purpose, the causal factors are divided into “behavioral” and “nonbehavioral.” The former are identified as (1) the ratio (c) of currency to money and (2) the ratio (r) of cash reserves held by the commercial banks to demand deposits. The nonbehavioral factors considered are (1) changes in net foreign assets (Δ F), (2) changes in credit to the government (Δ DG), and (3) policy-induced changes in monetary liabilities (Δ Lp) of the Central Bank. If Δ F and Δ DG are considered autonomous (i.e., outside the control of the Central Bank), then changes in Lp may be properly ascribed to policies of the Central Bank. The relative influence of changes in Lp on money supply (M), compared with that of behavioral and other nonbehavioral factors, should provide an indication of the relative influence of monetary policy on money supply in each of the member countries of the BCEAO as well as in the currency area as a whole.

I. Introduction

THE PURPOSE OF THIS PAPER is to examine the changes in money supply during the period 1962–68 in the seven African countries (Dahomey, Ivory Coast, Mauritania, Niger, Senegal, Togo, and Upper Volta) that have a common central bank, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), with a view to determining the relative importance of the various factors causing such changes. For this purpose, the causal factors are divided into “behavioral” and “nonbehavioral.” The former are identified as (1) the ratio (c) of currency to money and (2) the ratio (r) of cash reserves held by the commercial banks to demand deposits. The nonbehavioral factors considered are (1) changes in net foreign assets (Δ F), (2) changes in credit to the government (Δ DG), and (3) policy-induced changes in monetary liabilities (Δ Lp) of the Central Bank. If Δ F and Δ DG are considered autonomous (i.e., outside the control of the Central Bank), then changes in Lp may be properly ascribed to policies of the Central Bank. The relative influence of changes in Lp on money supply (M), compared with that of behavioral and other nonbehavioral factors, should provide an indication of the relative influence of monetary policy on money supply in each of the member countries of the BCEAO as well as in the currency area as a whole.

The principal instruments of credit policy employed by the BCEAO are quantitative rediscount ceilings on short-term and medium-term credit. They include global rediscount ceilings for each country and individual ceilings on the rediscounts of each bank. Rediscount ceilings for short-term credit are based on estimated needs of individual countries for the period under review. In arriving at these ceilings, account is taken of commercial banks’ own resources in order to ensure that they use their own resources fully before resorting to rediscount facilities of the Central Bank. In general, the individual ceilings on commercial banks’ rediscounts with the BCEAO are subject to certain maximum limits (usually 50 per cent of their expected credit operations). Medium-term rediscount ceilings for each country are established on the basis of the estimated number of investment projects likely to require medium-term credit.

In addition to the rediscount ceilings, banks are required to maintain a minimum liquidity ratio between their short-term assets and liabilities. For this purpose, however, nonrediscountable assets are excluded from the assets, while liabilities to the BCEAO are included in liabilities. By including only rediscountable credits, the liquidity ratio discourages the extension of nonrediscountable credits by banks and improves the effectiveness of the rediscount policy of the Central Bank.

II. The Model

The changes in money supply (Δ M) may be considered as the sum of changes in money supply caused by the variations in the monetary liabilities of the Central Bank (Δ ML) and by the fluctuations in the money multiplier (Δ Mk), which expresses the relationship between money (M) and total monetary liabilities (L) of the Central Bank.1 Thus,

ΔM=ΔML+ΔMk,and(1)
k=1c+r(1c)(2)

where c is the ratio of currency with the public to money supply and r is the ratio of commercial banks’ cash reserves to their demand deposits. In equation (1), ΔMLt in period t may be approximated by ΔLt.kt1,

while ΔMkt is approximated by Lt.Δkt.2 Thus,

ΔMt=ΔLt.kt1+Lt.Δkt.(1)

Δ ML may be further subdivided into changes owing to foreign assets (Δ MF), to net credit to the government (Δ MDG), and to policies followed by the Central Bank (Δ MLP). Thus,

ΔML=ΔMF+ΔMDG+ΔMLP.(3)

Similarly, since k is determined by c and r,

ΔMk=ΔMc+ΔMr(4)

where Δ Mc is the change in money supply caused by changes in the cash ratio and Δ Mr is the change caused by a change in the reserve ratio of the commercial banks.

Total change in money supply can, therefore, be broken into five components:

ΔM=(ΔMF+ΔMDG+ΔMLP)+(ΔMc+ΔMr).(5)

The statistical calculations presented below will identify these components for each of the seven BCEAO countries. From the point of view of the BCEAO, Δ MF, Δ Mc> and Δ MDG may be regarded as exogenous, while Δ MLP indicates the impact of its policies on the money supply. As regards Δ Mr, it could be attributed to the Central Bank’s policies if the reserve ratio is actively influenced by it; otherwise, it may be attributable to a change in the behavior of commercial banks and considered exogenous from the point of view of the Central Bank.

III. Statistical Computations

In Table 1 are summarized the cash ratios, the reserves ratios, and the money multipliers, as well as the annual average deviations (in per cent) from the respective averages for the period for the whole of the BCEAO area as well as for individual member countries. It will be seen that the money multiplier (k) varied from a low (annual average) of 1.48 in Upper Volta to a high (annual average) of 2.00 in Senegal; for the entire area it averaged 1.75. The annual variations in k also differed in the seven countries considered here. As a percentage of the annual average value for the entire period, such variations ranged from 4 in Ivory Coast to 9 in Mauritania and Senegal.

Table 1.

BCEAO Countries: Average Ratios of Currency to Money(c), Average Ratios of Cash Reserves to Deposits (r), Average Money Multiplier(k), and Annual Average Deviations, 1962–68

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Source: International Monetary Fund, International Financial Statistics.

Simple arithmetic average for the period.

Simple arithmetic average of annual deviations from the average for the whole period.

In per cent.

Average currency ratio (c) also ranged from 48 per cent in Senegal to 67 per cent in Upper Volta, with the annual average deviation from the average for the period being the highest (24 per cent) in Mauritania. A similar wide dispersion is also marked in the behavior of reserve ratios (r), from 3 per cent in Togo to 10 per cent in Ivory Coast, Niger, and Mauritania.

The effects on money supply of the changes in k and in monetary liabilities are shown in Table 2. For the area as a whole, about 40 per cent of the change in M is attributable to the change in money multiplier and about 60 per cent to the change in monetary liabilities. These effects have varied from country to country; the computed effects of the changes in money multiplier were relatively small in Ivory Coast, Niger, Togo, and Upper Volta but relatively large in Dahomey, Mauritania, and Senegal. In four of the seven countries (Niger, Mauritania, Senegal, and Upper Volta), the effects of changes in L were in opposite direction to those in k, taking the entire period as a single unit.

Table 2.

BCEAO Countries: Separation of Changes in MoneyM) into Changes Owing to Changes in Money MultiplierMk) and in Monetary LiabilitiesML), 1962–68

(In billions of CFA francs)

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The variations in k are caused by (1) variations in cash ratio (c) and (2) variations in reserve ratio (r). In Table 3 computed changes in money supply attributable to the changes in kMk) were subdivided into those (A Mc) caused by the changes in the cash ratio and those (Δ Mr) caused by the changes in the reserve ratio. The change in k arising from changes in c and in r may be roughly approximated by the formula.3

Table 3.

BCEAO Countries: Separation ofΔMkinto Changes Owing to Changes in Cash Ratio (ΔMc) and in Reserve Ratio (ΔMr), 1962–68

(In billions of CFA francs)

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Δk=(1r)Δc[c+r(1c)]2(1c)Δr[c+r(1c)]2(6)

The corresponding change in money supply arising from changes in c and in r in any period is arrived at by multiplying each term of the right-hand side of the equation by monetary liabilities of the Central Bank in that period. In Table 3, Δ Mc was calculated according to the formula given above and the remainder of Δ Mk was attributed to changes in r.4 It will be seen that the effects of changes in the currency ratio have dominated the changes in money supply attributable to variations in k. In all seven countries, there has been a downward trend in c, causing an increase in the money multiplier. The reserve ratio (r), on the other hand, has tended to increase somewhat, but its overall negative effect on M has been rather small. It may, therefore, be concluded that almost the entire variation in money supply attributable to the changes in money multiplier (approximately 40 per cent) has been behavioral and not policy induced.

What can be said about Δ ML, the change caused by changes in the monetary liabilities of the BCEAO? In Table 4, Δ ML is subdivided into changes attributable to the changes in foreign assets (Δ MF), in net credit to government (Δ MDG), and, as a residual, in policy-induced changes in monetary liabilities (Δ MLP). For the area as a whole, the computed changes in money supply owing to policy-induced changes in the monetary liabilities accounted for 97 per cent of the change in money supply attributable to the changes in total monetary liabilities of the BCEAO. However, this result is vitiated by the Senegal case where Δ MLP was large (presumably to partially offset the effects of the decline in foreign assets) and accounts for over half of Δ MLP for the area as a whole; excluding Senegal, the policy-induced variations account for only 30 per cent of the changes in total monetary liabilities of the BCEAO. For Dahomey, Niger, Senegal, and Togo, the policy-induced variations in monetary liabilities tended to offset the effects on money supply of changes in foreign assets and in net credit to the Government. In Ivory Coast and Upper Volta, the policy and autonomous factors exercised similar impulses. It is difficult, therefore, to see any consistent relationship between exogenous and policy-induced changes in the monetary liabilities of the BCEAO. However, there is an inverse relationship between the two implied in the credit policy operations of the BCEAO, which fixes rediscount ceilings for each bank after taking into account commercial banks’ “own” resources. Thus, in the event of an increase (decrease) in foreign assets, these banks’ “own” assets will increase (decrease) and entail smaller (larger) recourse to the BCEAO.

Table 4.

BCEAO Countries: Separation ofΔMLinto Changes in Foreign Assets(ΔMF), in Net Credit to Government(ΔMDG), and in Policy-Induced Monetary Liabilities(ΔMLP), 1962–68

(In billions of CFA francs)

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The proportion of Δ M attributable to policy-induced variations in its monetary liabilities is shown in Table 4. This proportion was 56 per cent for the aggregate area but considerably smaller for Ivory Coast (26 per cent) and substantially larger for Niger (129 per cent). In Dahomey, Mauritania, Senegal, and Togo there was an inverse relationship between policy-induced change in money supply and total changes in money supply; however, the ratio was small in Dahomey and Mauritania but large in Senegal and Togo. Furthermore, it may be noted that in Ivory Coast, Senegal, and Togo (the three countries accounting for a large part of the variations) the changes in foreign assets have had an impact on money supply nearly twice that of the changes induced by policy variations.

The relative influences on money supply of various factors considered above are summarized in Table 5. The influence of policy-induced variations in the monetary liabilities of the BCEAO on total money supply was greater than 50 per cent in Niger, Senegal, Togo, and Upper Volta and less in Dahomey, Ivory Coast, and Mauritania. The relationship between Δ M and Δ MLP was also positive for Ivory Coast, Niger, and Upper Volta but negative in Dahomey, Mauritania, Senegal, and Togo.

Table 5.

BCEAO Countries: Components of Changes in Money Supply, 1962–681

(In per cent)

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Sources: Tables 14.

Col. 1 = Cols. 2 + 3.

Col. 2 = Cols. 4 + 5 + 6.

Col. 3 = Cols. 7 + 8.

IV. Conclusion

The wide differences in money multipliers, both in their average values as well as in their annual fluctuations, would appear to suggest that an application of a unified monetary policy for the area as a whole could present difficulties. Consideration would need to be given to the monetary impact of a given change in monetary liabilities for each country separately. Furthermore, the relative stability of the money multiplier in Ivory Coast, Niger, Togo, and Upper Volta compared with that in Dahomey, Mauritania, and Senegal should facilitate the task of the monetary authorities in the former group of countries. So far, however, the changes in money supply in most of these countries appear to have been influenced more by the changes in foreign assets than by policy actions, as defined above, of the monetary authorities, although for the area as a whole the reverse is true. This, of course, does not imply that monetary policy has been “inadequate,” especially since no consideration has been given here to the possible effects of monetary policy on external reserves nor to a formulation of criteria by which to judge the adequacy of monetary policy. Such an inquiry would require a further detailed country analysis.

Facteurs influençant les variations de la masse monétaire dans les pays membres de la BCEAO

Résumé

Le document analyse les variations de la masse monétaire dans les sept pays d’Afrique de l’Ouest qui ont une banque centrale commune, la Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO). II attribue ces variations à des facteurs de comportement ou à des facteurs autonomes—en ce sens qu’ils échappent à tout contrôle direct—et à des modifications de politique de la part des autorités monétaires. On constate que si pour l’ensemble de la zone monétaire un peu plus de 50 pour cent des variations de la masse monétaire sont dues à des changements de politique monétaire, cette proportion a varié d’un minimum de 26 pour cent en Côte-d’Ivoire à un maximum de 129 pour cent au Niger. Dans certains pays, comme la Côte-d’Ivoire, le Sénégal et le Togo, l’incidence des variations des avoirs extérieurs sur la masse monétaire a été près de deux fois plus forte que celle résultant des modifications de la politique adoptée.

Il existe, d’un pays membre à l’autre, des écarts très marqués entre les valeurs moyennes, des multiplicateurs de la monnaie de même qu’entre leurs fluctuations annuelles. Cela semblerait indiquer que la mise en æuvre d’une politique monétaire homogène applicable à l’ensemble de l’Union Monétaire pourrait présenter des difficultés et qu’il conviendrait de tenir compte de son incidence dans chaque pays pris séparément. Le multiplicateur de la monnaie semble être suffisamment stable dans la plupart des pays membres de la BCEAO, ce qui devrait faciliter la tâche des autorités monétaires de ces pays.

Factores que influyen en las variaciones de la oferta monetaria en los países del BCEAO

Resumen

En este trabajo se analizan las variaciones de la oferta monetaria en los siete países de Africa occidental que comparten el mismo banco central, Uamado Banco Central de los Estados de Africa Occidental (BCEAO). Las variaciones se atribuyen a factores ya sea de comportamiento o autónomos, en el sentido de que las autoridades monetarias no tienen en la actualidad ningún control directo sobre ellos, o a variaciones experimentadas en la política seguida por las autoridades monetarias. Se ve que, aunque para el conjunto de la región, algo más de la mitad de las variaciones de la oferta monetaria se debieron a cambios de politica, esa proportion varió desde un minimo del 26 por ciento en la Costa de Marfil hasta un maximo del 129 por ciento en Níger. En algunos paises, por ejemplo, Costa de Marfil, Senegal y Togo, el efecto derivado de las fluctuaciones de los activos externos sobre la oferta monetaria ha sido casi el doble del proveniente de variaciones en política.

El valor medio de los multiplicadores monetarios, así como las fluctuaciones anuales de los mismos, difieren considerablemente de país a país. Esto da a entender que sería difícil unificar la política monetaria de toda la zona y que se debe tener en cuenta el efecto de dicha política en cada uno de los países. El multiplicador monetario parece ser suficientemente estable en la mayoría de los países miembros del grupo, y en esos países debería facilitar la tarea de las autoridades monetarias.

*

Mr. Bhatia, Assistant Director in the African Department, is a graduate of the University of Bombay and of Oxford University. He was formerly a member of the staff of the Indian Ministry of Finance and has contributed several articles to economic journals.

1

Joachim Ahrensdorf and S. Kanesa-Thasan, “Variations in the Money Multiplier and Their Implications for Central Banking,” Staff Papers, Vol. VIII (1960), pp. 126–49.

2

Ibid., p. 132.

3

Ahrensdorf and Kanesa-Thasan, op. cit., p. 143.

4

The opposite calculations, where Δ Mr is calculated according to the formula and the residual attributed as Δ Mc, provided results similar to these indicated in Table 3.