Proceedings of Annual Spain Business Research Conference
14 - 15 September 2015, Novotel Barcelona City Hotel, Barcelona, Spain
ISBN: 978-1-922069-84-9
Which Combination Is Desirable? Monetary Policy and
Exchange Rate Regime in West Africa
Kimiko Sugimoto and Takashi Matsuki**
This paper investigates the performance of monetary policy in four West African
countries, i.e., Cote d’Ivoire, Senegal, Ghana and Nigeria. They are main members of
ECOWAS (Economic Community of West African States) and intend to introduce a
regional common currency in 2020. At the present stage, Cote d’Ivoire and Senegal
implement the monetary policy under a currency board regime of a common currency
(the CFA franc) pegged to the Euro. Although both Ghana and Nigeria still adopt
flexible exchange rate regime, they have different monetary policy targets. Ghana
implements an inflation targeting policy, while Nigeria implements a monetary
aggregate target policy.
These four countries currently have different combinations of the monetary policy
and exchange rate regime, respectively. Thus, this paper compares the properties of
these different policy combinations by examining the degree of monetary autonomy
and the impact of monetary policy shock on output and prices.
This paper applies the VAR model with Markov-switching structure to monthly data of
their inflation rates and money growth rates during 1994-2014 to check the ability to
pursue an independent monetary policy. The results show that only Ghana had a
monetary autonomy during the non-crisis period but the other three countries could not
have it regardless of exchange rate flexibility.
This paper also applies the VAR model following Sims and Zha (1998) and Kim and
Roubini (2000) to the quarterly data during 1994-2014 of industrial production index,
consumer price index and money stock, interest rate of these four countries to examine
their respective transmission mechanism of monetary policy. The results indicate that
Ghanaian GDP increased in response to the decrease in policy rate. That is, only
Ghana’s monetary authority could implement effectively its monetary policy, which
seems to be consistent with our result obtained by estimating the MS-VAR model in the
previous section.
Moreover, these economies reacted to commodity price shocks with a larger degree
and external shocks from EU or USA as the candidate countries of future anchor
currency if the commodity (oil) price (level or volatility), the ECB repo rate and the US
policy rate are additionally used.
Finally, this paper finds out empirically that different combinations of monetary policy
and exchange rate regime do produce neither same transmission mechanism nor
same response to the external shocks. Among the different combinations, the empirical
results in case of Ghana suggest that the combination of floating regime and Inflation
targeting is the best one at the present stage in West Africa, if these four
commodity-dependent countries plan to introduce a regional single currency in West
Africa. The exchange rate regime-monetary policy autonomy nexus should be
reconsidered carefully if the ECOWAS monetary authority in the near future could
pursuit a regional common independent monetary policy.
Key words: Monetary policy, VAR, External shock, Monetary union, West Africa
JEL classification: E52; F45; O55; Q33; C32

Dr. Kimiko Sugimoto (corresponding author): Associate professor, Hirao School of
Management, Konan University, Japan. E-mail: kimiko@center.konan-u.ac.jp.
**
Dr. Takashi Matsuki: Professor, Department of Economics, Osaka Gakuin University, Japan.
E-mail: matsuki@ogu.ac.jp.