Abstract

The aim of this paper is to investigate on the effectiveness of the liquidity effect of monetary policy actions in the CEMAC region. As the conventional wisdom states, a cornerstone for the central bank to stimulate the economy is to lower interest rates by increasing the supply of narrow money. However, a number of empirical studies argue that monetary shocks rather raise than lower short term interest rates. Among problems are the choice of the appropriate measure of money and the set of identifying assumptions about policy shocks. In this study we take an account of these difficulties and adopt a methodology advocated by Christiano and Eichenbaum(1991) which seems appropriate in the special case of the CEMAC countries. Our results show that apart from Cameroon, the leading economy of the region, the liquidity effect is not effective in the region. Regardless of the set of identification scheme used, there is some evidence of liquidity effects in Cameroon. In the other countries, either this effect is absent (Chad) or the effect is preceded by a liquidity puzzle, admits a price puzzle and some counterfactual effects on output (Central African Republic, Congo, Equatorial Guinea and Gabon). A related question on the liquidity effect literature is the loanable funds effect, as put forwards by Friedman and Schwartz (1982). We argue that as the liquidity effect, there is no real support of a loanable effect in the CEMAC area.

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