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Policy Mix Coherence: What Does it Mean for Monetary Policy in West Africa?

René Tapsoba (), Jean-Louis Combes () and Nasser Ary Tanimoune ()
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Jean-Louis Combes: Centre d'Etudes et de Recherches sur le Développement International(CERDI)

No 201213, Working Papers from CERDI

Abstract: This article examines the influence of Policy Mix coherence in Economic Community of West African States (ECOWAS). The paper innovates in two ways. First, through an interaction between the monetary conditions index and the primary structural fiscal balance, we highlight coherence-type complementarities between monetary policy and fiscal policy with regard to their effects on economic activity. Second, we show that the influence of the coherence of policy mix on the effect of monetary policy is different according to the stance of the economy within the four possible regimes of policy mix, mostly in the WAEMU subsample, where integration is deeper than in the non-WAEMU countries, thanks to the common currency (the Franc CFA) they share. The analysis is based upon a panel dataset from 1990 to 2006 and remains robust to alternative specifications used to calculate the monetary conditions index. Our results contribute to the debate regarding the prospect of an ECOWAS-wide common currency. Indeed, given the heterogeneity in the economic structure of its members States, more policy mix coherence seems necessary to avoid unexpected impacts of monetary policy on economic activity.

Keywords: Policy Mix; Structural Fiscal Balance; Monetary Conditions Index; Economic Community of West African States. (search for similar items in EconPapers)
JEL-codes: E63 O55 (search for similar items in EconPapers)
Pages: 19
Date: 2012
New Economics Papers: this item is included in nep-afr and nep-mon
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