Demand for Broad Money and Implication of Monetary Policy Instruments on Inflation Control: Evidence from WAMZ Countries

Inflation is a major problem facing the West Africa Monetary Zone (WAMZ). This economic menace requires stability in broad money demand and appropriate monetary policy instruments to control. Thus, this study focused on exploring the demand for broad money and implications of monetary policy instruments on inflation control in the West Africa Monetary Zone (WAMZ) using time series and panel data. The objectives of this study are to examine the impact of demand for broad money (m2) on inflation in the WAMZ countries, and also to examine the implication of monetary policy instrument on inflation control in the WAMZ countries. The study covered the period of 1980 to 2023 and employed the Augumented Dickey – Futher unit root test (ADF), Johansen’s co-integration test and the error correction model (ECM) to estimate the long-run relationship between real broad money (m2) and inflation. The variables include: real broad money (M2), interest rate on short term deposit, yield on the WAMZ treasury bills, expected inflation, expected depreciation of WAMZ currencies against the US dollar, yield on US treasury bills and foreign interest rate. Results from the long-run coefficient estimation shows that real gross domestic product (scale variable in %) positively and significantly imparted on broad money demand both in the long and short run while other explanatory variables has insignificant impact on broad money demand in the WAMZ. There appears to be a long-run relationship for demand for real M2 but the relationship is not stable. Exogenous output shocks, financial innovations, changes in income velocity, and inadequate data quality contributed to the instability. The authorities may need to apply the monetary targeting regime in the overall objective of preserving price stability. A possible option for the WAMZ is to abduct an inflation target lite framework.