Inflation targeting: An example of a long-term stability rule for monetary policy applied to the case of the Banque Centrale des États de l'Afrique de l'Ouest (BCEAO)

This research explored the effectiveness of inflation targeting as a long-term stability rule of monetary policy applied by the Banque Centrale des Etats de l'Afrique de l'Ouest States (BCEAO) Through the estimation of a demand model and a supply model, the results shed light on the key determinants of economic activity and inflation in the West African Economic and Monetary Union (WAEMU). The analysis is based on an instrumental variable estimation method that takes into account the endogeneity of critical variables, notably expected future economic activity and expected inflation. The results show that current economic activity is positively influenced by future economic expectations and public spending, while it is negatively affected by the real interest rate and inflation volatility. This suggests that expectations of future growth play an important role in the region's economic dynamics, and that expansionary fiscal policies can stimulate aggregate demand. At the same time, supply-side analysis reveals that the actual inflation rate is strongly influenced by expected future inflation, past inflation and current economic activity, confirming a Phillips curve-type relationship where an increase in economic activity is associated with inflationary pressure. In the light of these results, economic policy recommendations have been formulated for the WAEMU monetary authorities. Key words: Inflation targeting, stability rule, monetary policy, West African Economic and Monetary Union (WAEMU).