THE REACTION AND IMPACT OF MONETARY POLICY ON WAMZ ECONOMIES:


 Englama and I. Jaju

1.0       Introduction

The critical role of monetary policy in macroeconomic management underscores the growing interest in investigations relating to how central banks react to business cycles and how such policies impact on the economy.  Following the seminal article of Taylor (1993), several empirical works have investigated  how central banks respond to price  and output developments,  with some studies (Romer, 2001 and Hsing, 2004) extending Taylor’s pioneer work to incorporate other peculiarities like exchange rate  dynamics in small open economy context. Other  studies (Raddat and Rigbon, 2003, Llaudes, 2007) have  also sought to ascertain the effects of central banks responses to business cycle on the economy, in attempts to investigate their optimality, effectiveness and channels of transmissions.

2.0 Research Problem/Question

Empirical works on central banks policies on the economies of the West African Monetary Zone (WAMZ)  however, remain limited. In the contest  of  WAMZ  Member States’ inability to attain and/or maintain all the convergence criteria for WAMZ monetary integration and the growing concern regarding high domestic interest rates, low growth recorded by some WAMZ economies at both aggregate and sectoral levels and the vulnerability of the zone to external shocks, many continue to ask the following questions: How does the central bank policy respond to economic fluctuations and shocks; what are the effects of monetary  policy on domestic prices, output and exchange rate; how does monetary policy react to fiscal policy among others.

3.0  Objectives of the study

In view of these concerns , the broad objective of the study is to investigate how central banks react to shocks and fluctuations in the economy and how such monetary policy shocks in turn impact on the economy. Specifically, the paper seeks to investigate how WAMZ central banks react to fluctuations in output, inflation, exchange rate and fiscal policy and how WAMZ monetary policies   in turn, affect domestic prices, output , exchange rate and fiscal policy.

4.0  Methodology

The study will use Structural Vector Autoregressive Model (SVAR) to achieve the objectives of the study. The use of SVAR model in the study is to enable us incorporate structural characteristic of the economy or impose restrictions on the responses of variables on each other based on the underlying VAR so as to give the impulse response functions and the variance decomposition a more “causal” meaning.

5.0       Expected Outcome

The findings of the study are expected to contribute to effective monetary policy formulation, implementation and coordination with other policies.


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