The transmission of monetary policy in a monetary union: the case of the West African Monetary Union (WAMU).

Summary The objective of this work is to analyze the transmission channels of monetary policy in the context of a monetary union. We first analyzed the governance, independence and transparency of the institutional framework for implementing monetary policy. Using the Grilli et al. (1991) model, we found that the BCEAO has a high degree of independence, consistent with modern central banks. Then, the estimation of structural VAR models on quarterly data, in which policy rates are considered exogenous and other variables weakly exogenous, shows the heterogeneity・ of the effects of monetary policy in the union member countries and the existence of two main transmission channels, namely the interbank rate channel and the credit channel. Our results confirm small but significant effects of key interest rates on inflation and investment. The direct effect of policy rates on GDP is small and insignificant. Finally, the study of the BCEAO's reaction function allows us to address issues related to the trade-off between inflation and output in the conduct of monetary policy. The estimation of a modified Taylor rule, incorporating an explicit intermediate target for external assets, leads to a trade-off in favor of activity since the implementation of the 1989 monetary policy reform.