IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/89108.html
   My bibliography  Save this paper

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

Author

Listed:
  • BIKAI, J. Landry
  • MBOHOU M., Moustapha

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.

Suggested Citation

  • BIKAI, J. Landry & MBOHOU M., Moustapha, 2016. "A Reaction Function for the Bank of the Central African States in a Context of Fiscal Dominance," MPRA Paper 89108, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:89108
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/89108/1/MPRA_paper_89108.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    2. Andrew Levin & Volker Wieland & John C. Williams, 2003. "The Performance of Forecast-Based Monetary Policy Rules Under Model Uncertainty," American Economic Review, American Economic Association, vol. 93(3), pages 622-645, June.
    3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    4. Wyplosz, Charles, 2002. "Fiscal Policy: Institutions versus Rules," CEPR Discussion Papers 3238, C.E.P.R. Discussion Papers.
    5. Li-gang Liu & Wenlang Zhang, 2007. "A New Keynesian Model for Analysing Monetary Policy in Mainland China," Working Papers 0718, Hong Kong Monetary Authority.
    6. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348, National Bureau of Economic Research, Inc.
    7. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
    8. Michael Kumhof & Ricardo Nunes & Irina Yakadina, 2010. "Simple Monetary Rules under Fiscal Dominance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 63-92, February.
    9. Taylor, John B. (ed.), 2001. "Monetary Policy Rules," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226791258, April.
    10. Laurence Ball, 2002. "Policy Rules and External Shocks," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 3, pages 047-064, Central Bank of Chile.
    11. KAMGNA, Severin Yves & NGUENANG, Christian & TALABONG, Hervé & OULD, Isselmou, 2009. "Fonction de reaction de la banque centrale et credibilite de la politique monétaire: Cas de la BEAC [Central Bank reaction fonction and monetary policy credibility: The case of BEAC]," MPRA Paper 16557, University Library of Munich, Germany.
    12. John B. Taylor, 2002. "The Monetary Transmission Mechanism and the Evaluation of Monetary Policy Rules," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 2, pages 021-046, Central Bank of Chile.
    13. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    14. Jean-Paul Pollin, 2005. "Théorie de la politique monétaire : esquisses d'une refondation," Post-Print halshs-00287720, HAL.
    15. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    16. Taylor, John B, 2000. "Alternative Views of the Monetary Transmission Mechanism: What Difference Do They Make for Monetary Policy?," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 60-73, Winter.
    17. W. A. Razzak, 2003. "Is the Taylor Rule Really Different from the McCallum Rule?," Contemporary Economic Policy, Western Economic Association International, vol. 21(4), pages 445-457, October.
    18. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-254, April.
    19. Wyplosz, Charles, 2005. "Fiscal Policy: Institutions versus Rules," National Institute Economic Review, National Institute of Economic and Social Research, vol. 191, pages 64-78, January.
    20. Danfeng Kong, "undated". "Monetary policy rule for China - 1994-2006," EAERG Discussion Paper Series 1405, School of Economics, University of Queensland, Australia.
    21. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
    22. Jean-Paul Pollin, 2005. "Théorie de la politique monétaire. Esquisses d'une refondation," Revue économique, Presses de Sciences-Po, vol. 56(3), pages 507-539.
    23. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wieland, Volker & Coenen, Günter, 2002. "Inflation dynamics and international linkages: a model of the United States, the euro area and Japan," Working Paper Series 181, European Central Bank.
    2. Philip Arestis & Alexander Mihailov, 2011. "Classifying Monetary Economics: Fields And Methods From Past To Future," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 769-800, September.
    3. Demir, İshak, 2014. "Monetary policy responses to the exchange rate: Empirical evidence from the ECB," Economic Modelling, Elsevier, vol. 39(C), pages 63-70.
    4. Wollmershauser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 493-519, September.
    5. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 207-228, April.
    6. C. Hueng, 2012. "Central Bank Behavior and Statutory Independence," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 40(2), pages 111-126, June.
    7. repec:zbw:bofitp:2009_023 is not listed on IDEAS
    8. Ansgar Belke & Thorsten Polleit, 2007. "How the ECB and the US Fed set interest rates," Applied Economics, Taylor & Francis Journals, vol. 39(17), pages 2197-2209.
    9. Ather Maqsood Ahmed & Wasim Shahid Malik, 2011. "The Economics of Inflation, Issues in the Design of Monetary Policy Rule, and Monetary Policy Reaction Function in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 16(Special E), pages 213-232, September.
    10. Mehrotra, Aaron & Sánchez-Fung, José R., 2011. "Assessing McCallum and Taylor rules in a cross-section of emerging market economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(2), pages 207-228, April.
    11. Frömmel, Michael & Schobert, Franziska, 2006. "Monetary Policy Rules in Central and Eastern Europe," Hannover Economic Papers (HEP) dp-341, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    12. Narek Ohanyan & Aleksandr Grigoryan, 2021. "Measuring monetary policy: rules versus discretion," Empirical Economics, Springer, vol. 61(1), pages 35-60, July.
    13. Christopher Allsopp, 2002. "Macroeconomic Policy Rules in Theory and in Practice," Discussion Papers 10, Monetary Policy Committee Unit, Bank of England.
    14. Patra, Michael Debabrata & Khundrakpam, Jeevan Kumar & Gangadaran, Sivaramakrishnan, 2017. "The quest for optimal monetary policy rules in India," Journal of Policy Modeling, Elsevier, vol. 39(2), pages 349-370.
    15. Andrés Felipe Giraldo & Martha Misas Arango & Edgar Villa Pérez, 2011. "Reconstructing the recent monetary policy history of Colombia from 1990 to 2010," Vniversitas Económica 8860, Universidad Javeriana - Bogotá.
    16. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics.
    17. repec:bla:intfin:v:6:y:2003:i:3:p:349-80 is not listed on IDEAS
    18. Caglayan, Mustafa & Jehan, Zainab & Mouratidis, Kostas, 2012. "Asymmetric monetary policy rules for open economies: Evidence from four countries," MPRA Paper 37401, University Library of Munich, Germany.
    19. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
    20. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
    21. Shawn Chen‐Yu Leu & Jeffrey Sheen, 2006. "Asymmetric Monetary Policy in Australia," The Economic Record, The Economic Society of Australia, vol. 82(s1), pages 85-96, September.
    22. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    23. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.

    More about this item

    Keywords

    monetary policy; prices stability; central bank.;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:89108. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.