Financial conditions index: A guide to monetary policy for selected WAMZ countries
List of Authors
  • Baba N. Ya’aba

Keyword
  • Monetary Policy, FCI, Monetary Policy Transmission, ARDL

Abstract
  • The increasing quest for monetary integration/union is said to be largely a consequence of the success of the European Monetary Union (EMU). Despite, the benefits of monetary union, however, it is not without its challenges, prominent among which is the loss of national monetary sovereignty. Even as individual small open economies, the monetary policy formulation and implementation is highly cumbersome and challenging. The shift of responsibility to a common central bank in a union further makes the challenge far more daunting. This, and other reasons, has led central banks to consider the use of the financial conditions index (FCI) as a gauge of the stance of monetary policy and a complimentary tool for monitoring financial system stability. This study develops FCIs for Ghana and Nigeria, the two largest economies of the West African Monetary Zone (WAMZ) using a weighted approach. The data spans 2004Q1 through 2023Q2. It brings together the four key channels of monetary policy transmission mechanisms and applies an autoregressive distributed lag model to estimate the coefficients of the variables. The results for both countries give prevalence to the exchange rate channel while the credit channel is considered the least effective. The resultant FCIs trace fairly well the policy direction of the countries for the study period and, hence, can serve both as a gauge of monetary policy and a monitoring device for financial system stability. The study therefore recommends, amongst others, the official adoption of FCI as an indicator of monetary policy and a complimentary instrument of macroprudential policy by the two WAMZ member countries.

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