External constraint and procyclicality of monetary policy of the Bank of Central African States (BEAC)

Ngomba Bodi, Francis Ghislain (2022): External constraint and procyclicality of monetary policy of the Bank of Central African States (BEAC). Forthcoming in:

Abstract

Monetary policies are known as procyclical in developing countries. For instance, there exists a consensus on the main factors of this monetary policy procyclicality: (i) procyclicality of capital flows in emerging markets, and (ii) weak institutional framework in Sub-Saharan African countries. However, hard peg regime requirements (in terms of FX reserves level to possess) and the importance of terms of trade shocks in Franc Zone countries prompts us to reconsider this debate and to explore other factors, especially for central African countries. In this paper, we analyse the important role of external constraint (FX reserves to imports ratio, the de facto nominal anchor) in the BEAC’s monetary policy procyclicality. Using a general equilibrium model with some structural features of central African economies, we demonstrate that: (i) a monetary shock has a more volatile effects on real variables in the current monetary policy framework than in an Inflation Targeting (IT) regime, (ii) the current monetary policy framework in Central Africa suggest a monetary tightening following a negative macroeconomic shock, and (iii) the delayed restrictive reaction of central bank following a negative oil shock induce additional macroeconomic costs. This results suggest: (i) to include the question of monetary policy procyclicality in the agenda of monetary reforms, and (ii) to consider the possibility of another nominal anchor for BEAC’s monetary policy which combines the monetary policy’s countercyclicality and the possibility to defend the currency.

• Item Type: MPRA Paper
• Language: English
• Keywords: procyclicality, monetary policy procyclicality, external constraint, business cycles fluctuations, DSGE, hard peg regime
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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