Monetary policy effect on balance of payment in West Africa

Abstract

The study examined monetary policy regimes and the balance of payment in West Africa. The study's objective was to examine the effect of monetary policy regimes on the balance of payment in West Africa. The study adopted an ex-post facto research design and obtained secondary data from documents of the Central Banks of the WAMZ countries, the World Bank Development Indicator (WDI), and the International Monetary Fund (IMF) database from 2001 to 2021. The estimation technique employed was the Panel Autoregressive Distribution Lag model, complemented by the Juodis, Karavias, and Sarafidis (2021) granger-causality test. According to the findings, the various monetary policy regimes in West Africa had conflicting effects on the balance of payments. It demonstrates how that goal can be achieved in the short term using the money supply and monetary policy rate. However, over time, policy rate had a positive effect on the balance of payments, as the money supply was insignificant. These results are particularly importantcrucial given the goal of unifying the monetary policy regime in the ECOWAS in 2027. Based on the findings, the paper concluded and recommends that to achieve a balance of payment equilibrium in West Africa, the monetary policy rate is an effective tool, this is because it is significant in explaining the changes in the balance of payment in the countries in West Africa. Thus, monetary authorities should ensure a correct balance of the rate when to increase or decrease the policy rate with the hindsight of implications on the current account.