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Inflation and Economic Performance in the CFA Franc Zone: Transmission Channels and Threshold Effects
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Author(s): Komlan Fiodendji (University of Ottawa, Canada), Bernadette Dia Kamgnia (The African Development Bank, Tunisia)and Nasser Ary Tanimoune (University of Ottawa, Canada)
Copyright: 2014
Pages: 20
Source title:
Econometric Methods for Analyzing Economic Development
Source Author(s)/Editor(s): Peter V. Schaeffer (West Virginia University, USA)and Eugene Kouassi (University of Cocody, Cote d'Ivoire)
DOI: 10.4018/978-1-4666-4329-1.ch002
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Abstract
This chapter examines the relationship between inflation and economic performance in the CFA franc zone over the period 1991-2009 and studies the mechanism through which inflation affects long-term economic growth. Using a threshold model, the evidence strongly supports the view that the relationship between inflation and economic growth is nonlinear with a unique threshold. The most striking difference between West Africa Economic and Monetary Union (WAEMU) zone and Central African Economic and Monetary Community (CEMAC) zone is that the coefficients of inflation are all significantly negative for all inflation regimes, while for WAEMU zone, the coefficient of inflation is positive for the low and high inflation regimes. Further investigation suggests that for the WAEMU countries, but not for the CEMAC countries, the level of investment is the channel through which inflation nonlinearly affects economic growth. One of the main contributions of this chapter is to enable the policymakers, specifically central bankers in each zone, to concentrate on those policies that keep the target of inflation, which may be helpful for the achievement of sustainable economic growth. Low inflation is also helpful for minimizing the uncertainties in the financial market, which in turn boost the investment in the country.
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