Money Demand in the West African Economic and Monetary Union: The Problems of Aggregation

Regional monetary integration and financial liberalization continue to change the conditions for monetary policy in the West African Economic and Monetary Union (WAEMU). The Union’s central bank, the Banque Centrale des Etats de l’Afrique de l’Ouest (BCEAO), now faces the question of how to adapt its monetary policy without destabilizing the fixed exchange rate system with the French franc. The BCEAO requires accurate information on the effects of macroeconomic changes on the demand for money. The identification of a regional money demand function is made more difficult by the economic heterogeneity among the seven WAEMU participants. Cte d’Ivoire stands out with regard to its economic size and financial sector. This may inhibit the estimation of a long-run equilibrium relationship between money and further macroeconomic variables for the entire region. This paper presents estimates of the demand for broad money for the WAEMU region. The analysis identifies a stable regional relationship between real broad money, output, and the opportunity costs of holding money. The results support the BCEAO’s transition to indirect monetary policy. The paper presents the institutional environment for the money demand estimation in the WAEMU, including the effect of the relatively low state of financial development in the economies; it discusses data selection, the estimation methodology and estimation results, which are assessed and interpreted in the light of the potential bias due to aggregation. App., bibliogr., notes, ref., sum.