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Estimation of the Equilibrium Interest Rate: Case of CFA zone

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  • Dramani, Latif
  • Laye, Oumy

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).

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 3610.

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Date of creation: 18 Jun 2007
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Handle: RePEc:pra:mprapa:3610

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Keywords: Taylor Rule; equilibrium interest rate; Kalman filter;

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  1. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, National Bureau of Economic Research, Inc.
  2. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
  3. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, Springer, vol. 27(1), pages 113-129.
  4. Huchet-Bourdon, Marilyne, 2003. "Fonctions de réaction des banques centrales européennes et convergence," L'Actualité Economique, Société Canadienne de Science Economique, Société Canadienne de Science Economique, vol. 79(3), pages 297-326, Septembre.
  5. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  6. Jordi Gali & Mark Gertler, 2000. "Inflation Dynamics: A Structural Econometric Analysis," NBER Working Papers 7551, National Bureau of Economic Research, Inc.
  7. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1750, C.E.P.R. Discussion Papers.
  9. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:
  1. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "On the Stratonovich – Kalman - Bucy filtering algorithm application for accurate characterization of financial time series with use of state-space model by central banks," MPRA Paper 50235, University Library of Munich, Germany.

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