Monetary Policy Rules: Lessons Learned from ECOWAS Countries

This paper analyses the monetary policy conduct of some central banks in Economic Community of West African States (ECOWAS) member countries in the post-monetary reforms era, to establish whether they follow the Taylor Rule or its subsequent modified reaction functions. Interest rate policy rules have been estimated to ascertain this. Despite the declared use of indirect monetary policy management, the empirical evidence suggests that Ghana and Nigeria's monetary policies are not consistent with the monetary policy rule according to the original Taylor formula or its adjusted variants. The robustness tests carried out using different estimation methods and inflation and output gap measurements, have not led to a significant improvement in the results of regressions. Interest rates weakly react to the variations of inflation and the output gap. Similar results are observed even if interest rates equations are adjusted by exchange rate, money, foreign assets and credit aggregates. In the case of the West African Economic and Monetary Union (WAEMU), the central bank seems to apply a Taylor rule which is adjusted by the interest rate of France.