Monetary Policy Neutrality in WAEMU Countries: A SVAR Model

Abstract

In an economic context characterized by significant fiscal imbalances and secular stagnation in WAEMU countries, some economists advocate using money to influence real economic activity. The aim of this paper is to analyze the neutrality of money in WAEMU countries. To address this issue, we set up a 2-lag SVAR dynamic model with short-term constraints to assess the responses of output growth rate, inflation rate and real interest rate to monetary shocks. The results of our estimations show that money is weakly active in the union countries, due to the long lags between monetary policy action and its impact on output. In addition, we find that inflation rates in WAEMU countries are highly sensitive to monetary shocks, which means that the effective growth resulting from the monetary shock cannot be sustained. The transmission of these shocks on the inflation rate and output growth rate is only partial, since the pass-through coefficients of the money supply are less than unity in all countries. This study suggests that the political and economic independence of the Central Bank should be strengthened, so that monetary policy is not used for opportunistic purposes.