Monetary policy and economic performance of West African Monetary Zone Countries

This study examined the monetary and macroeconomic stability perspective for entering into monetary union, using data available on WAMZ countries. It tests the hypothesis that independent monetary and exchange rate policies have been relatively ineffective in influencing domestic activities (especially GDP and inflation), and that when they do, they are counter productive. Usiing econometric methods, regression result show that, erstwhile domestic monetary policy, as captured by money supply and credit to government hurt real domestic output of these countries. Indeed, rather than promote growth, it was a source of stagnation. It also confirms that there appear to be a two quarters lag in monetary policy transmission effect with regard to real sector output. The results also show that although expansion in domestic output dampened aggregate consumer prices (inflation), it was however, not adequate enough to dampen the fuelling effects of past inflation. This was accentuated by money supply variable (MS2) and aggravated by exchange rate variable which are mostly positive, confirming the a priori expectations that rapid monetary expansion and devaluations fuels domestic inflation. A country by country comparison of the single and simultaneous equations model results show that expansionary monetary policy contributed more to fuelling prices than it did to growth. It also shows that interest rates policy had adverse effects on GDP by exhibiting a positive sign contrary to the theoretical expectation of an inverse relationship. The results also show that exchange rate devaluations manifest mainly in domestic inflation and have no effect at all on the growth variable, in the short term. The study concludes that these countries would be better-off to surrender its independence over these policy instruments to the planned regional body under appropriate monetary union arrangements.