Monetary Policy Regulation for the Bank of Central African States (BEAC)

Abstract

This paper aims to put forward a reaction function concerning the behaviour of the Bank of the Central African States (BEAC) turned toward the future then increasing the exchange rate to ensure the internal and external balance in the countries of this monetary zone. Based on the CFA currency and US dollar equivalence, it comes out that there is a strong non linearity between the interest rate and the exchange rate gap. The optimal gap level of the exchange rate in long term (short term) beneath which the monetary authorities should try to reduce the nominal interest rate is 277 F CFA (260 F CFA) and beyond which they will increase to maintain internal and external balance of the economy of the countries in this zone. So, the exchange rate should be taken as a target whose drift should govern the adjustment of the monetary policy instruments notably the interest rate.