Analysis of the Taylor rule in the WAEMU: a decomposition of stress tests during economic shocks

Abstract

The aim of this article is to assess the applicability of the Taylor rule in the context of the West African Economic and Monetary Union (WAEMU), which comprises eight low-income countries using the CFA franc.

The methodology of the study consists of calculating the interest rates resulting from the Taylor rule using aggregate and national data, and then analysing the differences between these rates.

By examining the differences between the resulting interest rates, the study aims to understand the structural factors influencing the monetary policies of WAEMU countries and proposes solutions for reducing existing disparities.

The results of the study show that most of the economic stress in the WAEMU zone comes from inflation. Analysis of the period from 1985Q1 to 2013Q4 shows that inflation is the main factor of economic stress in the zone studied. However, after the implementation of the Pact, WAEMU economies put more emphasis on output stress than on inflation stress. The weighting coefficients used in the analysis reveal a persistence of production-related stress.

These results suggest that the specific output of the WAEMU economies is not strongly correlated with the average for the zone, despite relatively small inflation losses.

In sum, this study uses the Taylor rule to evaluate monetary policy in the WAEMU and analyses the resulting interest rate differentials. The results highlight the importance of taking into account structural factors and economic disparities specific to each member country when implementing common monetary policies. These findings provide valuable information for policymakers and investors in the zone, with a view to promoting more balanced and sustainable economic growth.

Key words: Taylor rule, West African Economic and Monetary Union (WAEMU), monetary policy, interest rates, inflation, growth, stress test.

JEL Classification: F22

Paper type: Empirical research.