url
15
Jan
2014

Empirical Performance of Monetary Aggregates in BEAC and BCEAO: Introduction

Empirical Performance of Monetary Aggregates in BEAC and BCEAO: IntroductionDuring the 1970’s, monetary aggregate have been assigned an important role in the implementation of monetary policy. Monetary aggregates Ml and M2 were considered as good guides for monetary policy. Since the 1980s, the traditional relationship between money and policy target variables has deteriorated in many countries. Consequently, money growth targets have begun to lose their importance and in the last decade, have almost completely lost their central role in the conduct of monetary policy. Therefore, there is no consensus concerning the role of monetary aggregates in the implementation of monetary policy. Friedman demonstrates that monetary aggregates are no more useful. He argues that instability of money velocity due to financial innovations is the major explanation of the downgrading of quantitative controls. On the contrary, Adam and Hendry show that money conserves its role in the implementation of monetary policy, since it still fulfils the properties of stability, controllability and information content. Payday Loans Online

Beyond this debate, a third series of studies emerged from the literature. These studies compare the empirical performances of Divisia monetary aggregates and simple sum monetary aggregates. A review of the literature shows that there is no convergence in the findings. In fact, some studies confirm the empirical superiority of Divisia monetary aggregates on the traditional ones in the implementation of monetary policy. For Drake and Mills, the superiority of Divisia monetary aggregates on empirical ground is not always established.
However, these studies are limited to developed countries, although Habibullah and Dahalan et al create Divisia monetary aggregates in some Asian countries. There is lack of studies concerning African countries. Therefore, two African Central Banks are taken as case study namely BEAC and BCEAO. The main reason which justifies the choice of these Central Banks is the fact that their monetary policies are theoretically based on monetarist hypotheses. According to this hypothesis, the primary objective of monetary policy is to guarantee price stability by controlling the evolution of monetary aggregates. Another reason is that, like the majority of the Central Banks in the world, the two Central Banks construct their official monetary aggregates by simply summing their monetary components.
Despite their widespread use, economists have long recognized that the simple summation approach to monetary aggregation is less than optimal. Referring to the simple sum index, Fisher wrote that “the simple arithmetic average produces one of the very worst of index numbers”. The traditional monetary aggregates are criticized because monetary assets are entered in the aggregate with a weight equal to unity. The implication of this is that there is a perfect substitution between all component assets.

During the 1970’s, monetary aggregate have been assigned an important role in the implementation of monetary policy. Monetary aggregates Ml and M2 were considered as good guides for monetary policy. Since the 1980s, the traditional relationship between money and policy target variables has deteriorated in many countries. Consequently, money growth targets have begun to lose their importance and in the last decade, have almost completely lost their central role in the conduct of monetary policy. Therefore, there is no consensus concerning the role of monetary aggregates in the implementation of monetary policy. Friedman demonstrates that monetary aggregates are no more useful. He argues that instability of money velocity due to financial innovations is the major explanation of the downgrading of

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Kevin J. Brandon

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