A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

Rethinking Pro-growth Monetary Policy in Africa: Monetarist Versus Keynesian Approach / Repenser La Politique Monétaire Pour La Croissance En Afrique: Approche Monétariste Versus Keynesienne

Policy brief by Christian Lambert NGUENA, 2013

Download original document (English)

The relative positive economic growth experienced by most African countries in the recent decade has come with insufficient demand stimulation. The concern of poverty at the forefront of economic policy, the need for inclusive growth and sustainable development, inter alia, brings forward the inevitable question of the monetary policy responsibility. Accordingly, the monetarist theory that focuses on price stability inherently neglects the demand stimulation aspect of economic prosperity. Since the mid 1980s, the monetarist school driven by its central aim of fighting inflation and maintaining credibility in markets and economic agents has been priority for monetary authorities (especially in Africa). To this effect, while good results in terms of inflation targeting has been achieved in many African countries; economic growth has sometimes been low. Hence, in light of the above, using a statistical and theoretical debate method, the Credible Monetary Policy (CMP)1 paradox is traceable to Africa. Accordingly, with the promising economic environment in Africa, we recommend the promotion of a monetary policy oriented toward improving economic growth under the constraint of price stability. In light of the above view, there are some note worthy signs such the recent decision by the two CFA zone central banks to either maintain interest rates at a low level or reduce it despite tightening measures of monetary policy taken by the European Central Bank (ECB) earlier in the year. In the same vein, the central bank of South Africa has maintained its policy of low interest rates with an objective of economic expansion. Since, the 2008 financial crisis, the consolidation of the Federal Reserve’s declared final objective of lowering interest rates and making emergency loans is an eloquent example to reassure African central banks in the choice of the pro-growth monetary policy option.

Africa Economic Brief


* Christian Lambert NGUENA is a Consultant at the African Development Institute (EADI), African Development
Bank) / Researcher at the CEREG (Centre of Study and Research in Economics and Management) [ :
clanguena@yahoo.fr]. The author is grateful to the AERC (African Economic Research Consortium), UNECA
(United Nations-Economic Commission for Africa), REMA (Research in Applied Micro and Macroeconomics),
LAREM (Laboratory for Analysis and Research in Mathematical Economics), and CEREG for their support.
The author is also grateful to the anonymous referee and Asongu S. A. for editorial comments.


1 Credible Monetary Policy in terms of price stability objective.


Chief Economist Complex | AEB Volume 4, Issue 6, 2013


Outline


1 | Introduction p.2
2 | Theoretical link between


the CMP in terms of fight
against inflation and economic
growth p.2


3 | PARADOX OF CMP
IN AFRICA: Confrontation
of theoretical evolution
to practical results in the context
of application p.3


4 | PARADOX OF CMP
IN AFRICA: From mixed
empirical results to concrete
State reaction examples p.5


5 | Conclusion and Economic Policy
Recommendations p.7


The findings of this Brief reflect
the opinions of the authors and not
those of the African Development
Bank, its Board of Directorsor
the countries they represent.


Mthuli Ncube
Chief Economist & Vice President
(ECON)
m.ncube@afdb.org
+216 7110 2062
Charles Leyeka Lufumpa
Director, Statistics Department (ESTA)
c.lufumpa@afdb.org
+216 7110 2175
Steve Kayizzi-Mugerwa
Director, Development Research
Department (EDRE)
s.kayizzi-mugerwa@afdb.org
+216 7110 2064
Victor Murinde
Director, African Development
Institute (EADI)
v.murinde@afdb.org
+216 7110 2075


Rethinking Pro-Growth Monetary Policy
in Africa: Monetarist versus Keynesian Approach


Christian Lambert NGUENA*


Key Messages
The relative positive economic growth experienced by most African countries in the recent
decade has come with insufficient demand stimulation. The concern of poverty at the
forefront of economic policy, the need for inclusive growth and sustainable development,
inter alia, brings forward the inevitable question of the monetary policy responsibility.
Accordingly, the monetarist theory that focuses on price stability inherently neglects the
demand stimulation aspect of economic prosperity.


Since the mid 1980s, the monetarist school driven by its central aim of fighting inflation
and maintaining credibility in markets and economic agents has been priority for monetary
authorities (especially in Africa). To this effect, while good results in terms of inflation
targeting has been achieved in many African countries; economic growth has sometimes
been low. Hence, in light of the above, using a statistical and theoretical debate method,
the Credible Monetary Policy (CMP)1 paradox is traceable to Africa. Accordingly, with the
promising economic environment in Africa, we recommend the promotion of a monetary
policy oriented toward improving economic growth under the constraint of price stability.


In light of the above view, there are some note worthy signs such the recent decision by
the two CFA zone central banks to either maintain interest rates at a low level or reduce
it despite tightening measures of monetary policy taken by the European Central Bank
(ECB) earlier in the year. In the same vein, the central bank of South Africa has maintained
its policy of low interest rates with an objective of economic expansion.


Since, the 2008 financial crisis, the consolidation of the Federal Reserve’s declared final
objective of lowering interest rates and making emergency loans is an eloquent example
to reassure African central banks in the choice of the pro-growth monetary policy option.


Keywords: Pro growth monetary policy; CMP paradox; Financing enterprises; African
central bank.


Classification JEL: C23; C33; E52; E58.




2 | Chief Economist Complex | AEB Volume 4, Issue 6, 2013


1 | Introduction


The International Monetary Fund (IMF), the African Develop-


ment Bank (AfDB) and the United Nations Economic Com-


mission for Africa (UNECA) agree on the following: beyond ef-


fective good performance in terms of economic growth,


African economies have a higher growth potential that can en-


able them to become a potential growth pole (UNECA, 2012;


AfDB, 2013). Accordingly, with the involvement of authorities,


this potential can easily be realized with respect to the Key-


nesian theory because total liberalism has been the source of


destabilization and exposure to crises. Thus the aim of un-


leashing the economic potential of Africa can only be achie-


ved with an optimal choice based on contextualization of cy-


clical interventions and taking into account a global


environment characterized mainly by shocks and crises.


The latest financial and debt crises have led to the launching


of several stimulus plans to rescue the global economy. Whe-


reas Africa was virtually absent from the concert of world re-


covery plans, the majority of sub-regions in the continent


have felt a pinch of the crises. The Economic and Monetary


Community of Central African States (CEMAC) and Economic


and Monetary Community of West African States (WAEMU) felt


(albeit with a slight delay) and continue to feel the heavy effects


of the crises.


Indeed, the relative disconnection between African banking and


financial systems and the global financial markets (with the ex-


ception of a few countries like South Africa) and stabilization


policies carried-out by monetary authorities since 1990s ban-


king reorganizations, have initially put them out of heavy direct


effects experienced by banks, insurance companies and other


international financial centers in the world. However, African


economies are not spared. Effects of the crisis are already felt


by African countries and probably will continue in the long run.


Both effects can thus be identified: the effects affecting the fi-


nancial sphere and those affecting the real economy. At the fi-


nancial sphere, the situation of expensive credit experienced


for several years by African economies was exacerbated. In-


deed, there is a paradox between the presence of abundant


bank liquidity and the lack of funding on the one hand and the


excessive cost of credit on the other hand (Ndjanyou, 2001;


Asongu, 2013 a,b,c; Nguena, 2013). This situation by impro-


ving enterprises finance issue tends to negatively impact in-


vestment and therefore economic growth. Furthermore,


Nguena (2013) in a country-level study finds that SMEs have


more chance to get short term credit than long term credit.


Thus these realities in Africa allow us to underline the mone-


tary policy issue in Africa and rethink its implementation and


final objectives which are important for economic growth.


Since the mid-80s, monetary policy is the main policy instru-


ment used by most governments. The need to fight against in-


flation and maintaining credibility with markets and economic


agents have thus led the authorities to give priority to this ins-


trument. Indeed the current neoclassical school focuses on


central bank credibility as an efficiency factor of its monetary


policy from the perspective of achieving its ultimate objective


of price stability. These developments which derive some of


their sources from theoretical analyzes of monetary policy in


terms of credibility2 could be the reason of good results in the


fight against inflation in Africa with however a low economic


growth. Yet as the first section of this paper will show, the CMP


in the fight against inflation should theoretically have a positive


influence on economic growth.


However in order to unleash the truly economic growth po-


tential of African Countries by making it become effective, mo-


netary policy modeled on monetarist theory can be challenged


in favor of a Keynesian approach.


In order to verify this affirmation we will go through a theore-


tical and empirical literature review applied to the African


context which first highlights the paradox of monetary policy


in terms of its impact on economic growth and secondly pro-


pose a model of monetary policy for economic growth in


Africa. For a robust and homogeneous analysis we will in the


population of Africa consider the sample of sub-Saharan


Africa countries with a particular focus on CEMAC zone coun-


tries. This analysis and debate is more interesting and justified


since practically, several central banks in Africa have decided


to not only focus on price stability as recommended by the


monetarist school but also to stimulate economic growth by


(for example) lowering interest rates.


2 | Theoretical link between the CMP in terms
of fight against inflation and economic growth


The origin of theoretical analysis on the credibility and inde-


pendence is Kydland and Prescott (1977) who highlighted the


problem of time inconsistency and the ambition to solve this


2 In this work, we consider that a monetary policy is credible when it guarantees the continuity of Central Bank action in pursuing its objective of price stability,
and managed to stop monetary funding of budget deficits.




problem especially in the case of monetary policy. Thus they


propose as solution a policy based on a rule.


The benefits of inflation come from the existence in their mo-


del of a non-vertical Phillips curve in the short term. This im-


plies that unanticipated monetary expansion lowers the unem-


ployment rate below the equilibrium rate and increase activity


in real terms.


The cost of inflation most often described in the literature is


meanwhile scrambling of signals from prices by inflation. In-


deed, higher inflation generally leads to a higher variability of


inflation. This will result in an increase in uncertainty about fu-


ture inflation and a decline in the information contained in re-


lative prices. This increased uncertainty and the scrambling of


relative prices will act negatively on investment and innovation


and, therefore, be unfavorable for factor productivity and


hence economic growth.


Under the assumptions listed above, contrary to a policy rule,


discretionary policy leads to a higher inflation and well being


costs. While this offers more flexibility for governments, it is


better in theory for a central bank to “tie their hands”. This


commitment would earn the credibility to conduct monetary


policy which is ultimately the best point of view of welfare and


especially GDP growth. Under these conditions, the CMP


would have an impact on economic growth. As an illustration,


a synthetic chart3 of the link between a CMP and economic


growth is presented in figure 1 below.


3 | PARADOX OF CMP IN AFRICA:
Confrontation of theoretical evolution to
practical results in the context of application


"Country, big or small, cannot aspire to a policy of develop-


ment if it does not control monetary arrangements." This


speech of Amin (1973) on monetary barriers to intra-African


trade expansion and development in Africa, highlights the im-


portance of monetary policy on development in the continent.


It implicitly assumes that monetary policy affects real variables


of the economy. However the theory is not unanimous about


the reality of such a link:


The long-term effects of monetary policy:


From a theoretical point of view, the effects of long-term mo-


netary policy were first, according to Solow (1956), studied un-


der the Neo classical growth model. The question was re-


peated with the development of endogenous growth models.


The development of endogenous growth models has helped


to clarify the mechanisms by which money creation and infla-


tion expectations are likely to influence long term economic


growth. Thus, most of these models emphasize the role


played by the household savings rate. A monetary policy that


would positively affect this variable could have a real effect on


the growth rate.


Skeptical theses for a limited relationship between


Monetary Policy and Economic Growth:


Very old theses asserting a limited relationship are mainly


shared by monetarists such as Friedman (1968) and by some


prominent economists as Poole. According to them the only


purpose of monetary policy is to ensure price stability, by


preventing any counter-cyclical action which tends to disturb


markets, as uncertainty weighs on action deadline of mone-


tary policy. Authors have taken this view by affirming that ac-


cording to Friedman, monetary policy affects only nominal va-


riables such as nominal interest rates or price levels;


Accordingly, the central bank cannot hope to be effective by


targeting any value of real variable, because the impact on real


variables such as (Gross Domestic Product) GDP or the unem-


ployment rate are transient in nature and very random.


AEB Volume 4, Issue 6, 2013 | Chief Economist Complex | 3


3 This chart was deduced from that presented in the article of Mésonnier (2004).


Figure 1 Theoretical link between a CMP
and economic growth


Source: “Le paradoxe de la crédibilité”
with author modification.




4 | Chief Economist Complex | AEB Volume 4, Issue 6, 2013


In order to resolve this theoretical debate, it is necessary to


make a comparison with African reality instead of a simple im-


plementation of what is fashionable elsewhere.


3-1 Confrontation of the monetary policy theory
to the application context


The neoclassical orthodoxy argues in favor of money neu-


trality in the short and long term. This consensus based on


life cycles theory orients the role of the monetary authority


to the absolute pursuit of price stability over the medium and


long term. It assumes that agents maximize their intertem-


poral utility by using the complete knowledge of the complex


economy. Retaining the same analytical framework, the


New Keynesian Economics propose a new synthesis which


consists of introducing the assumption of sticky prices and


wages. Under this review, price rigidity is the cause of dis-


tortions in consumption that cause the economy to not


realize its growth potential (Gali, 2002). For example, New


Keynesian economics, rather than assuming that prices


react to market imbalances, guess they are set optimally, so


as to best serve the interests of firms that are supposed to


fix them, (Woodford, 2003). Only then, an active monetary


policy can correct distortions caused by the rational beha-


vior of firms. This policy is for the Central Bank to follow a


rule that the interest rate is adjusted to respond to the in-


flation differential and the output gap. In this context, money


is not neutral.


In fact, the introduction of nominal rigidities in a model of real


business cycle led to the reformulation of the Phillips curve,


implying a lack of trade-off between inflation and product


(Gali, 2002). So that, if the Central Bank is committed to price


stability, it can achieve stability of output gap. Under this mo-


del, a change in monetary policy affects the product imme-


diately when it is not possible that all prices and wages ad-


just themselves. Thus, the analysis of New Keynesian


Economics shares with the analysis of the New Classical


School the principle of a monetary policy dedicated only to


the stability of general price level consistent with the search


for neutrality. If we follow this analysis, in which prices are


flexible, it is not necessary to conduct an active monetary po-


licy to stabilize the economy. So it is only in a world charac-


terized by fixed prices that we must refer to monetary policy.


This is the case for most African countries. However it is in


the U.S. that this policy is most active; In Africa it is never


used for product and employment stimulation. There is an


obvious contradiction here. Discretionary policies, especially


monetary policies, are needed in the African continent where


the performance in terms of price stability is well established,


providing a possibility that monetary authorities could take


advantage. Inflation is only the price to pay for economic sti-


mulus. Moreover, the strict application of an inadequate rule,


far from guaranteeing neutrality can only generate real dis-


tortions.


3-2 Which real goal for pro-growth monetary
policy in Africa?


According to Epstein (2005) in the last two decades, there


has been a global sea change in the theory and practice of


central banking policy. Actually and globally the dominant


practice approach to monetary policy consists of the central


bank independence with a focus on inflation fighting (including


adopting formal inflation targeting) and the use of indirect me-


thods of monetary policy like short-term interest rates as op-


posed to direct methods such as credit ceilings. It is with this


framework that price stability and inflation targeting have


been identified as priority objective assigned to the Central


Bank in many African economies. South Africa and Ghana for


example, clearly show the inflation targeting as an explicit


strategy of monetary policy. The contemporary economic


analysis justifies this choice by its importance to the econo-


mic situation in the long run. This is an institutional framework


within which the action of the Central Bank should be pri-


marily oriented to price stability which means low and stable


inflation. The Central Bank exercises control on the economy


through its intervention on the interbank money market, as it


is controlling the quantity or the price but not both variables


simultaneously. They therefore can pursue only a single ob-


jective in the sense of Tinbergen (1954). Price growth is na-


turally selected because of the existence of a strong rela-


tionship between the quantity of money in circulation and the


general price level (Friedman, 1968). In addition, the econo-


mic and social costs of inflation are the main motivations for


the choice of price stability as an objective. More recent


theoretical developments on expectations emphasize the


credibility factor as guarantor of monetary policy effective-


ness. The role and effectiveness of monetary policy is most


often analyzed with reference to monetary rules whose ge-


neral objective is to improve the wellbeing of people through


the stabilization of the economy on its long-run equilibrium.


It is assumed that this equilibrium is in no way affected by mo-


netary policy and depends only on structural variables such


as the natural rate of unemployment. In this perspective, the


price stability objective is understandable. However, is it pos-


sible that this general point of view should be applied in


Africa without contextualization?




AEB Volume 4, Issue 6, 2013 | Chief Economist Complex | 5


Concerning this issue, by trying to see how central banks can


become agents of development, Epstein (2005) argues that the


neo-liberal and monetarist approach to monetary policy is


highly idiosyncratic in that, as a package, it is dramatically dif-


ferent from the historically dominant theory and practice of cen-


tral banking, not only in the developing world, but notably, in the


now developed countries themselves. According to him more


than the current monetary policy fashion which is to consider


that the only roles central banks can play as agents of deve-


lopment is to create a context of “macroeconomic stability” in-


cluding financial stability through financial regulations, central


banks can do better. In our histories, we can see that for much


of central banking history, many central banks have aspired to


do much more than that, with a number of them even seeing


themselves as “agents of development” in the self-aware mea-


ning of the term. Indeed throughout the early and recent his-


tory of central banking in the U.S., England, Europe, and el-


sewhere, financing governments, managing exchange rates,


and supporting economic sectors by using “direct methods” of


intervention have been among the most important tasks of cen-


tral banking and, in many cases, were among the reasons for


their existence. Western central banks’ (UK, Europe, Japan, US)


monetary policy after the second war were oriented to financing


and managing government debts accumulated during war in


the short term and rebuilding national economies by providing


social need often under government’s direction in the long term.


Central banks utilized a variety of credit allocation techniques


to accomplish their economic growth goals. The neoliberal


monetary policy package, then, is drastically out of step with the


history and dominant practice of central banking throughout


most of its history. At the end of this explanation we realize that


the monetary policies based on monetarist theory have not


been applied in other countries and continent without a contex-


tualization. Focusing on inflation fighting and price stability only


can reduce the growth potential of African economies.


A low inflation rate also has drawbacks. On the one hand, there


is the risk of plunging the economy into a liquidity trap and a de-


flationary spiral. In this situation, higher real interest rates may


not be unlimited (since nominal rates can not fall below zero)


and the monetary authorities might lose control of the economy.


On the other hand, inflation may be too low and cause a rise


in unemployment because of the downward rigidity of nominal


wages. Adjustments of real wages may be made necessary by


regional or sectoral shocks. However, such adjustments are


probably more difficult when inflation is very low or even zero.


Recent pronouncements of the G3 for the activity under the


context of financial crisis management have put into question


the monetarist orthodoxy regarding the implementation of mo-


netary policy (Goodfriend, 2010). Good monetary policy is cru-


cial to the functioning of the economy: monetary and credit of-


fer vast opportunities to stimulate, stabilize or slow down a mo-


dern economy. With this in mind, these days, we can consider


that the dominant model of monetary policy is no longer adap-


ted to the new characteristics of the economies, as globaliza-


tion has caused the disappearance of inflation risk. In this


sense, a central bank could be a victim of its own success and


face what we can call the paradox of credibility. From a global


supply-demand equilibrium model point of view, there should


be an alternative between demand policy and supply policy for


an optimal equilibrium. In the case of most of African countries


the best result in the fight against inflation should allow them re-


lative possibility to follow this measure by supply policy.


Therefore, to determine the orientation of monetary policy by


tackling only inflation would have two possible consequences.


On one hand, the credibility of the commitment of central


banks to strengthen the fight against inflation and other struc-


tural factors likely to contain inflationary pressures. On the


other hand, while inflation expectations in the long run are bet-


ter anchored around the target of the central banks, an un-


sustainable expansionary phase could be reflected with a de-


lay in an acceleration of inflation (Mésonnier, 2004). On this


view, credible monetary policies that focused exclusively on


price stability may have contributed to the development of ma-


cro-financial imbalances in the late 1990s during the advent of


information and communication technology. However it was


not the case. It would be inappropriate to contemporary ope-


ned economies, interdependent, with high international mobi-


lity of goods, capital and labor. The theory of divine coincidence


which argues that by only stabilizing inflation as an objective,


the monetary authority also stabilizes the economy does not


seem to be applicable in practice (Bordes, 2007). A theoreti-


cal contribution of Blanchard and Gali (2005), shows that this


divine coincidence only come from the fact that, in the models


used, a number of imperfections (for example the real wage ri-


gidities) that exist in the economy are ignored. If they are taken


into account, the divine coincidence disappears. So it would


be better for African Central Banks to target principally eco-


nomic growth under the constraint of a low inflation objective.


4 | PARADOX OF CMP IN AFRICA:
From mixed empirical results to concrete State
reaction examples


Bernard (2000) addresses the question of the impact of mo-


netary policy on economic growth, with a purely Keynesian


and panel data approach, without focusing on the credibility


aspect. The results appear disappointing in the case of low-




6 | Chief Economist Complex | AEB Volume 4, Issue 6, 2013


level economic and financial development, but very encoura-


ging for countries that have a high income level. Before him,


Kone (2000) had analyzed the relative effectiveness of mone-


tary and fiscal policies through their actions on economic ac-


tivity of the (West African Economic and Monetary Union)


WAEMU member countries in real and nominal terms. In the


short- and long-term, using an error correction model, it high-


lights the real and nominal effects to emphasize the indirect ef-


fect of inflation whose control is a key objective of monetary


policy (unlike Bernard (2000), it performs an empirical inves-


tigation in time series). Ndiaye (2009) evaluates the relative ef-


fectiveness of monetary and fiscal policies in Senegal and


concludes that the relative effectiveness of monetary and fis-


cal policies remains subject to sources of uncertainty related


to unpredictable shocks from outside due to the weakness of


automatic stabilizers.


By focusing again on the effectiveness of monetary policy in


sub-Saharan Saxegaard (2006) shows that the excess liqui-


dity would have a negative effect, by the weakening of the


transmission mechanisms of economic policy, thereby redu-


cing monetary authorities power to influence demand condi-


tions in the economy. By studying the empirical link between


the CMP and economic growth in Africa in general and in the


CEMAC zone in particular using econometric panel data me-


thodology, Nguena (2009, 2012) found that the CMP in terms


of the fight against inflation has a significant and negative im-


pact on economic growth of states in the sub region and for


Africa countries.


In sum, the empirical analyzes conducted on this subject


have the advantage to suggest less ambiguous conclusions


than work that attaches directly to quantify the impact of mo-


netary policy on real activity.


A parallel observation of statistics on inflation and economic


growth evolution in Africa could be rich in learning about


achievements in terms of the growth of monetary policies in


Africa. By observing the figure below (performance corres-


ponding to the two extreme dates (1975 and 2015), implicitly


belonging to two different periods of previously applied Key-


nesian policies and recent policies inspired by monetarist


theories), we find a decrease of inflation (from 11% to 5.53%:


decrease of 5.47%) higher than the increase in economic


growth rate (from 3.80% to 5.41%: increase 1.61%). Moreo-


ver, African economies are different from Western economies


in that they are in majority developing countries synonymous


of higher potential uses of resources however relatively limited


by the monetary policy objective of price stability. Keynesian


policies would be most welcome in this environment. Since the


growth cost is inflation, the flexibility afforded by an environ-


ment of low inflation rate would become useful to monetary


authorities. There are countless examples where such policies


have been used successfully in the past in the Asian countries


including a latest decision to forget policy rules and choice of


intervention policy to save the European and American eco-


nomies from financial and debt crises.


The Federal Reserve with declared final objective which is a


sustainable economic growth may be cited as an example.


Since the beginning of crisis in 2007, the Federal Reserve em-


barked on a massive effort to stimulate growth by lowering in-


terest rates to zero since December 2008 and by financing the


government debt for more than U.S. $ 2 billion. Indeed Bloom-


berg Journal report of November 2011 shows that the Cen-


tral bank has made emergency loans, purchased assets and


other aid totaling more than $ 7.5 billion U.S.


In July 1998 the emphasis of the recession led the Malaysian


authorities to review their economic policies in deciding to opt


for Keynesian anti-cyclical policies (low interest rates, increase


money supply) aimed to reverse the recessionary trend (Bou-


zonville et al., 2006). Malaysia has moved from a liberal-ins-


pired (International Monetary Fund) IMF program to more


Keynesian policies from the summer of 1998 by globally in-


sulating its economy from the instability in the region by im-


posing strict controls on capital to protect its liquidity asset and


continue to fund the economic recovery.


According to UNECA (2012) The two central banks in the Afri-


can Financial Community (CFA) zone, for example maintained


interest rates at a low level in 2011 despite the tightening mea-


sures of monetary policy taken by the European Central Bank


Figure 2 Sub Saharan Africa’s inflation rate
and economic growth evolution


Source: Author calculation based on World Bank data base (2008)
and International Monetary Fund data base (2010 estimation).




AEB Volume 4, Issue 6, 2013 | Chief Economist Complex | 7


early that year. Lastly, first providing a predictable slowdown


in economic activity in the CEMAC zone in 2013 in conjunc-


tion with the decline in oil production and in public investment


and; secondly, noting that growth is mainly driven by the non-


oil sector (agriculture, manufacturing and service industries),


the BEAC (Central Bank of Central African States including 6


African countries: Cameroon, Congo, Gabon, Equatorial Gui-


nea, Chad, and Central African Republic) decided to imple-


ment the recommendation of this paper which is monetary po-


licy with a direct objective of economic growth. Indeed, noting


a slower growth cohabiting with relatively controlled inflationary


pressures and based on a study of various factors influencing


monetary and financial stability in the short term, the BEAC


through its Monetary Policy Committee (CPM) of July 2013 de-


cided to drop by 50 basis points the interest rate (TIAO) ap-


plied to banks from 4% to 3.5%. This recommendation is es-


pecially justified by the fact that the expected maximum


pressure on the price is 2.7%, which is indeed below the com-


munity standard.


Based on similar findings and in order to support economic


activity in the West African Economic and Monetary Union


(WAEMU) sub region, the Monetary Policy Committee (CPM)


of the BCEAO (Central Bank for West African Countries in-


cluding 8 African countries: Ivory Coast, Guinea Bissau, Mali,


Niger, Senegal, Togo, Benin and Burkina Faso) in June 2013


decided to keep interest rates unchanged at their current low


levels. The minimum interest rate for submission to calls for ap-


plication operations for liquidity injection and interest rate of the


marginal lending desk remains fixed respectively between


2.75% and 3.75%. Similarly, the Central Bank of South Africa


has maintained its policy of low interest rates during 2011 for


most part with an objective of economic expansion. These


practical examples of initiatives are to encourage as well as set


an example for other African countries with relative good re-


sults in terms of price stability.


5 | Conclusion and Economic Policy
Recommendations


According to statistics, the CMP in terms of the price stabi-


lity objective paradox is fully verified in Africa. With this rea-


lity, deep institutional changes are necessary. Highlights on


what should be the explicit objective of monetary policy to


play its full part in the development process. While it seems


to be a consensus in developed economies to limit the mis-


sion of monetary policy to price stability, however it appears


difficult for poor countries with low inflation, to not tailor the


policy towards economic development. The success of Afri-


can economies therefore requires the adoption by the cen-


tral bank a mandate that combines the priority objectives of


activity to the price stability; this assuming a comprehensive


reform of the ongoing monetary policy framework.


Empirical works mentioned above that have shown a nega-


tive impact of price stability on economic growth in Africa


would find an explanation in the fact that the objectives of


price stability and economic growth are opposed according


to Keynesians. Indeed we could establish a policy that would


lead them simultaneously since improving one can drive


down the other. Therefore, instead of continuing to work to-


wards achieving the objective of price stability, we must


make this objective relative in view of the evolution of real va-


riables in the sub-region including economic growth which is


very low. In the same view, the fact that the financial crises


have recently pushed most Northern countries to opt for re-


gulation in response, thus making the independence and cre-


dibility of their central banks relative, should be an example


to African countries. In addition (to strengthening this conclu-


sion), as a result of post-crisis Bretton Woods instructions,


the fiscal instrument was found to have relatively limited


scope for growth in African countries. In light of the above,


we are poised to recommend the promotion of monetary po-


licy oriented primarily towards the improvement of economic


growth in African countries through temporarily Keynesian


cyclical policies.


As mentioned in the paper, several central banks such as for


example the BEAC, the BCEAO and the Central Bank of


South Africa are currently applying measure based on this re-


commendation by not only focusing on price stability but also


maintaining interest rates at a low level to sustain economic


growth. These practical actions should be encouraged in re-


lation to the results of our analysis and serve as an example


for other central banks which have focused primarily on


price stability with good results in Africa.


References


1. AfDB (2013), Annual Development Effectiveness Review:


“Towards Sustainable Growth for Africa”. http://www.


afdb.org/fileadmin/uploads/afdb/Documents/Project-and


Operations/ ADER%20Annual%20Development%20Ef-


fectiveness%20Review%202013.pdf


2. Asongu, S. A., (2013a), “Fighting consumer price inflation


in Africa. What do dynamics in money, credit, efficiency and


size tell us?”, Journal of Financial Economic Policy, 5(1).


3. Asongu, S. A., (2013b), “A Short-run Schumpeterian Trip




8 | Chief Economist Complex | AEB Volume 4, Issue 6, 2013


to Embryonic African Monetary Zones”, Economics Bul-


letin, 33(1), pp. 859-873.


4. Asongu, S. A., (2013c), “How has politico-economic libe-


ralization affected financial allocation efficiency? Fresh Afri-


can Evidence”, Economics Bulletin, 33(1), pp. 663-676.


5. Bernard Eric (2000) : « Développement financier, politique


monétaire et croissance économique : validation empiriques


en données de panel », Laboratoire d’Economie d’Orléans.


6. Blanchar, O., & J. Gali, (2005), “Real wage rigidities and the


new Keynesian model”, FRB/JMCB Conference on Quan-


titive evidence on Price Determination, Washington.


7. Bouzonville N. et al. (2006), «Le contrôle de capitaux en


Malaisie», Reims Management school ; http://anthonypierre.


perso.neuf.fr/documents/Ecomalaisie.pdf


8. Comité de Politique Monétaire (CPM) de la BEAC « Com-


muniqué de presse », Séance du 19 juillet 2013 ;


https://www. beac.int/download/cpm_juillet2013.pdf.


9. Comité de Politique Monétaire (CPM) de la BCEAO « Com-


muniqué de presse » Séance du 3 juin 2013 ; http://www.


bceao.int/Communique-de-presse-de-la-reunion,2666.html


10. Epstein, G. (2006), « Central banks as agents of econo-


mic development », UNU-WIDER, Research paper N°


2006/54, May 2006.


11. Friedman, M. (1968), « Le rôle de la politique monétaire »,


The American Economic Review.


12. Gali, J. (2002), ‘New Perspectives on Monetary Policy, In-


flation, and the Business Cycle’, National Bureau of Eco-


nomic Research, Working paper 8767.


13. Goodfriend (2010), « Financial stability, deflation and mo-


netary policy », Monetary and Economic Studies, Bank of


Japan, Special Edition, February.


14. Kone (2000), « L’impact des politiques monétaires et bud-


getaires sur la croissance économique dans les Pays de


l’UEMOA », BCEAO Working Paper.


15. Mésonnier (2004), « Le paradoxe de la crédibilité en ques-


tion », Direction des Études économiques et de la Re-


cherche, Bulletin de la Banque de France - N° 122 – Fé-


vrier 2004.


16. Ndiaye, C. (2009) «Analyse de l’efficacité relative des po-


litiques monétaire et budgétaire au Sénégal».


http://www.univ-orleans.fr/leo/semmar9/sem_docto-


rants/ndiaye.pdf


17. Ndjanyou, L. (2001), « Risque, incertitude et financement


bancaire des PME Camerounaises : l’exigence d’une lo-


gique spécifique de l’analyse du risque », S/D Tsapi V., édi-


tion clé, pp. 327-343.


18. Nguena, C. L. (2009), “Credible Monetary Policy in CEMAC


zone and Economic Growth: a Panel Data Approach”, Afri-


can Economic Research Consortium (AERC).


http://www.aercafrica.org/documents/rethinkingworks-


hoppapers/NguenaPolitique.pdf


19. Nguena, C. L. (2012), “Fight against inflation and econo-


mic growth in Africa: the need of alternative”; UNECA-UNDP


Seminar Series Paper.


20. Nguena, C. L. (2013), “Financing of SMEs in Cameroon in


the context of financial crisis”, CIEA-FR Final Research Re-


port. www.trustafrica.org/icbe.


21. Saxegaard, M., (2006). “Excess liquidity and effectiveness


of monetary policy: evidence from sub-saharan africa“, Wor-


king Paper n° 115, IMF, P1-52.


22. Tinbergen (1954), “On the Theory of Economic Policy”. Re-


vue économique; Vol. 5.


23. UNECA (2012), “Unleashing Africa’s Potential as a Pole of


Global Growth”; http://www.uneca.org/eca_resources/Pu-


blications/books/era2012/front.pdf


24. UNECA (2012), « Vue d’ensemble de la situation écono-


mique et sociale en Afrique en 2011 », Réunion du Comité


d’experts Addis-Abeba (Éthiopie) 22-25 mars 2012.


http://www.uneca.org/cfm/2012/documents/French/COM1


2-OverviewEconomic-andSocialConditions-inAfricaFR.pdf


25. Woodford (2003). “Interest and Prices, Foundations of a


Theory of Monetary Policy”, Princeton University Press.
©


A
fD


B
2


01
3


-
D


E
S


IG
N


C
E


R
D


/Y
A


L




Login