How to improve the Effectiveness of Monetary Policy in the WAEMU

IMF Working Paper

The West African Economic and Monetary Union (WAEMU) is a currency union with a fixed exchange rate and limited capital mobility and, therefore, an independent monetary policy in the short run. The Central Bank of West African States (BCEAO) is conducting the single monetary policy with the main goal of pre serving price stability and supporting economic growth. However, the effectivenessof its monetary policy remains low, with a weak reaction of marketinterest rates and inflation to BCEAO’s policy actions. The paper concludes that, while the institutional setup and the instruments of monetary policy are adequate, the transmission mechanism of monetary policy remainsconstrained by liquidity management practices, shallowand segmented financial markets,andinterestrate rigidities. To improve the effectiveness of monetary policy the BCEAO should be more proactive in determining the stance of fiscal policies, develop financial markets,and liberalize controlled interest rates. The BCEAO isundertaking important reforms in thesedirections.