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

Jacques Landry Bikai and Moustapha Mbohou M.

MPRA Paper from University Library of Munich, Germany

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.

Keywords: monetary policy; prices stability; central bank. (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2016-11-30
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
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Published in REVUE INTERNATIONALE DE MANAGEMENT ET D'ÉCONOMIE APPLIQUÉE 1.1(2018): pp. 41-68

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