A Reaction Function for the Bank of the Central African States in a Context of Fiscal Dominance

BIKAI, J. Landry and MBOHOU M., Moustapha (2016): A Reaction Function for the Bank of the Central African States in a Context of Fiscal Dominance. Published in: REVUE INTERNATIONALE DE MANAGEMENT ET D'ÉCONOMIE APPLIQUÉE , Vol. 1, No. 1 (January 2018): pp. 41-68.

Abstract

The aim of this study is to estimate the reaction function of the BEAC and to assess the extent to which the monetary policy is influenced by the evolution of the financial situation of the States members of the CEMAC. We estimated two reaction functions of the Central Bank according to its two main monetary policy instruments: the monetary base and the policy rate, by taking into account the potential role of fiscal dominance. Estimates of quarterly data for Mc Callum rule for the monetary base and Taylor rule for the key interest rate in the CEMAC countries, over the period 1996 to 2013, revealed four major results. Firstly, we find that in the event of economic overheating, BEAC contracts the monetary base and releases it to support activity in the slowdown phases, revealing the sensitivity of the Central Bank to the evolution of the economic situation in the CEMAC when manipulating its monetary base. Secondly, the BEAC policy rate does not respond to the output gap or the inflation, due in part to the weakness of the transmission mechanisms and the inoperability of the interest rate channel. Thirdly, our results indicate that BEAC carries out a very high rate smoothing and the associated coefficient is of the order of 0.98, reflecting the uncertainties on the effects of its action. As for the fourth result, he indicates that the conduct of monetary policy is influenced by the financial situation of the States thus validating the hypothesis of fiscal dominance. We find, however, that fiscal dominance is more pronounced in the policy of managing the monetary base than in the policy rate setting strategy.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy, prices stability, central bank.
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; 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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