A quarterly projection model for WAEMU

Author/Editor:

Carlos de Resende; Fall of Alsim; Demba Si



Publication date:

October 28, 2022

Electronic access:

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Disclaimer: IMF Working Papers describe ongoing research by the author(s) and are published to elicit comment and encourage debate. The opinions expressed in IMF Working Papers are those of the authors and do not necessarily represent the views of the IMF, its Board of Directors, or IMF management.


Summary:

This study describes a semi-structural neo-Keynesian (MPQ) quarterly projection model for the WAEMU zone. In the context of a fixed exchange rate regime and relatively tight capital controls, the central bank of the WAEMU monetary union (Banque Centrale des Etats de l’Afrique de l’Ouest, BCEAO) can exercise some influence on domestic money markets and interest rates. We adjusted the canonical version of a new Keynesian semi-structural quarterly projection model (QPM) to capture this feature and other aspects specific to the BCEAO’s monetary policy framework, including an implicit target for foreign exchange reserves. The model, which is parameterized and combines calibration and Bayesian estimation techniques, displays dynamic properties for key variables in response to various shocks that are consistent with theoretical priors and empirical evidence. Medium-term forecasts taking into account the Covid-19 pandemic produce reasonable results compared to the forecasts produced by a standard VAR. The moments calculated from artificial data generated with the model correspond well to those observed in the data. Overall, the model exhibits desirable analytical properties and sensitive data coupling and forecasting capabilities and could therefore be used by the BCEAO to identify relevant shocks, map their propagation in the WAEMU regional economy and better support its monetary policy decisions.