Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting Versus Flexible Currency Board in Ghana, South Africa and the WAEMU

Abstract

The aim of this paper is to examine the monetary policy actions through which the central banks in the Sub-Saharan African countries have searched to eliminate the negative impacts of the shocks facing their economies. We compare two types of monetary policy regimes: a currency board regime (in the CFA zone countries) and an inflation targeting policy regime (in Ghana and South Africa). We compare the properties of both policies when the central banks respond to three negative shocks hitting the economies: a recessionary demand shock, a supply shock increasing inflation and a negative fiscal shock. We propose an FPAS model (forecasting and monetary policy analysis system) that extends the usual FPAS models used in the literature to evaluate the impact of several policies in response to different types of exogenous shocks. We find that both policies are inappropriate to help the economies exiting from the effects of negative demand shocks (the adjustment relies mainly on fiscal policy), both are essential when negative shocks to primary balance occur (fiscal policy aggravates the negative effects of the shocks), while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.