Estimation of the Equilibrium Interest Rate: Case of CFA zone

Latif Dramani and Oumy Laye

MPRA Paper from University Library of Munich, Germany

Abstract: Problem Statement The framework of this study is consisted of the countries of zone CFA and in fact the two central banks (BCEAO and BEAC) in charge of the monetary policy implementation. There was a great resurgence of interest these last years on the question in the way of leading the monetary policy. One of the indicators of this phenomenon is the enormous volume of recent papers and the conferences prepared on this subject. In addition, much of macro economists proposed specific rules of policy or ruled on the way in which the monetary policy should be led. The principal objective of this study is the evaluation of the macroeconomic gold rule in the CFA countries which stipulates that in an economy with equilibrium growth and under simplifying macroeconomic assumptions: the neutral interest rate is equal to the potential growth rate of the economy. Research Method To achieve this objective we try to determine the weight of the goals of monetary and fiscal policies attaches with a quadratic reaction function which takes into account a target of inflation, public expenditure and interest rate. And then the methodology of determination of the neutral interest rate is derived from a generalized Taylor rule. The estimation of the parameters is based on panel data econometrics, the generalized method of moments and the Kalman filter. These different methods are used to emphasize the robustness of the results of our analysis. Results and conclusion The estimates carried out on the panel data emphasize a neutral interest rate in the interval of 1.4% to 1.6%. It is generally noticed that the estimates made on the panel data are compatible with those carried out by using the Kalman filter. In addition, it is observed that, overall the level of the natural interest rate in UEMOA zone (1.51) is lower than CEMAC zone (1.65). The most important neutral rate is observed in the Malian economy and the lowest in the Burkina economy. But we notice a larger homogeneity in CEMAC zone (standard deviation of 0.12) than UEMOA zone ( standard deviation of 0.29).

Keywords: Taylor Rule; equilibrium interest rate; Kalman filter (search for similar items in EconPapers)
JEL-codes: C1 C13 E0 E4 E43 (search for similar items in EconPapers)
Date: 2007-06-18
New Economics Papers: this item is included in nep-afr, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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