Output gap, Business cycles and Countercyclical monetary policy: Empirical evidence from the CEMAC zone and the Bank of Central African States (BEAC)

Abstract In this paper, we study business cycles and countercyclical monetary policy in the Economic and Monetary Community of Central Africa (CEMAC) for the post-devaluation period. Data. We use annual data between 1998 and 2022 on real GDP (in constant 2015 US) from (WDI, IMF) and the monetary policy rate of the Central Bank (BEAC). Methodology. The methodology is based on the Hodrick-Prescott framework, a non-parametric method widely used in applied macroeconomics to assess the potential trend in GDP and the components of business cycles. We shall use the framework of Ravn and Uhlig (2002) to calibrate the smoothing parameter (λ) as a function of the frequency of observations. Findings. (i) Considering the four phases of the business cycle (expansion, peak, trough, recovery) common to the literature, the longest business cycle according to our estimates over the period in the CEMAC zone lasts between 8 and 9 years, from 2003 to 2011. (ii) We found that the CEMAC zone has a slightly negative mean output gap (zero) due to asymmetric shocks. The proportion of negative shocks is slightly higher than positive shocks on average, indicating a continued economic slowdown (CEMAC States are more vulnerable to external shocks due to a lack of diversification in the growth structure and a high dependence on commodities such as oil, which is an extremely volatile market). Similarly, negative shocks to output could reflect the sluggishness and slackness of the labour market and especially the high unemployment figures often highlighted in CEMAC States. (iii) We have diagnosed countercyclical monetary policy post devaluation and found that, despite the exchange rate anchor framework (non-autonomous monetary policy), the BEAC tends to respond effectively to trends in the cyclical components of economic activity in the CEMAC zone by adjusting the monetary policy rate (at least for the gap and inflationary pressures), but with less impact on labour market. Greater economic convergence and better policy coordination between the CEMAC countries and the BEAC are more than necessary to guarantee the effectiveness of counter-cyclical policies, whether monetary or fiscal. JEL Classification: C14 ; E32 ; E52 ; E58 ; O55