Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC

Thierry Mvondo

doi:doi:10.11648/j.ijber.20190806.23

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Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC

Thierry Mvondo

Published in International Journal of Business and Economics Research (Volume 8, Issue 6)

Received: 28 October 2019 Accepted: 22 November 2019 Published: 2 December 2019

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Abstract

This paper investigates the macroeconomic effects of Central African States Bank (BEAC) commitment to ensure its nominal anchoring when the underlying external reserves constraint occurs after an oil shock. Indeed, the current monetary agreements place external reserves at the heart of the cooperation between BEAC and the French Treasury, and their fluctuations are the main risks indicators to the durability of the cooperation between these two institutions: a system described as pegged to reserves which neither fully resembles a fixed exchange rate regime or a flexible exchange rate regime, much less an intermediate regime. To this end, there is a need to monitor their ability to cover a proportion of the central bank's liabilities in the short run by tithing the monetary conditions, in order to avoid drastic adjustment measures as devaluation. Therefore, as a result of the fall of these reserves below their long run threshold, the central bank essentially focused on their recovery. Our framework is a Markov-switching approach of the Smets and Wouters textbook model were we have modelled the dynamics of external reserves from the balance of payments identity and the simplified balance sheet of the central bank. The monetary policy rule is also augmented by the gap of reserves to their long run trend. Two scenarios are subsequently evaluated namely, a variation of the probability of occurrence of the constraint while maintaining that of leaving or, conversely, a variation of the probability of exit from the constraint by assuming that its occurrence is fixed. The results obtained show that at the approach of the constraint and in the presence of an oil shock, the behaviour of the central bank induces many undesired effects such as the fall in consumption, investment and production. Conversely, when the probability of exit from the constraint is high, the central bank adopts a somewhat passive behaviour, with a late reaction that makes the imbalances continue. Following the fact that (i) export revenue of the region are mainly composed of oil resources (84%), (ii) imports are rigid and, (iii) the oil price cannot be under control of CEMAC countries for competitiveness purpose, the paper highlights the need for permanent monetary discipline alongside economic diversification.

Published in	International Journal of Business and Economics Research (Volume 8, Issue 6)
DOI	10.11648/j.ijber.20190806.23
Page(s)	422-438
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2019. Published by Science Publishing Group

Keywords

Occasionally Binding Constraint, External Reserves, Markov-Switching DSGE, Macroeconomics Effects

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Thierry Mvondo. (2019). Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC. International Journal of Business and Economics Research, 8(6), 422-438. https://doi.org/10.11648/j.ijber.20190806.23

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Thierry Mvondo. Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC. Int. J. Bus. Econ. Res. 2019, 8(6), 422-438. doi: 10.11648/j.ijber.20190806.23

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AMA Style

Thierry Mvondo. Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC. Int J Bus Econ Res. 2019;8(6):422-438. doi: 10.11648/j.ijber.20190806.23

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@article{10.11648/j.ijber.20190806.23,
  author = {Thierry Mvondo},
  title = {Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC},
  journal = {International Journal of Business and Economics Research},
  volume = {8},
  number = {6},
  pages = {422-438},
  doi = {10.11648/j.ijber.20190806.23},
  url = {https://doi.org/10.11648/j.ijber.20190806.23},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20190806.23},
  abstract = {This paper investigates the macroeconomic effects of Central African States Bank (BEAC) commitment to ensure its nominal anchoring when the underlying external reserves constraint occurs after an oil shock. Indeed, the current monetary agreements place external reserves at the heart of the cooperation between BEAC and the French Treasury, and their fluctuations are the main risks indicators to the durability of the cooperation between these two institutions: a system described as pegged to reserves which neither fully resembles a fixed exchange rate regime or a flexible exchange rate regime, much less an intermediate regime. To this end, there is a need to monitor their ability to cover a proportion of the central bank's liabilities in the short run by tithing the monetary conditions, in order to avoid drastic adjustment measures as devaluation. Therefore, as a result of the fall of these reserves below their long run threshold, the central bank essentially focused on their recovery. Our framework is a Markov-switching approach of the Smets and Wouters textbook model were we have modelled the dynamics of external reserves from the balance of payments identity and the simplified balance sheet of the central bank. The monetary policy rule is also augmented by the gap of reserves to their long run trend. Two scenarios are subsequently evaluated namely, a variation of the probability of occurrence of the constraint while maintaining that of leaving or, conversely, a variation of the probability of exit from the constraint by assuming that its occurrence is fixed. The results obtained show that at the approach of the constraint and in the presence of an oil shock, the behaviour of the central bank induces many undesired effects such as the fall in consumption, investment and production. Conversely, when the probability of exit from the constraint is high, the central bank adopts a somewhat passive behaviour, with a late reaction that makes the imbalances continue. Following the fact that (i) export revenue of the region are mainly composed of oil resources (84%), (ii) imports are rigid and, (iii) the oil price cannot be under control of CEMAC countries for competitiveness purpose, the paper highlights the need for permanent monetary discipline alongside economic diversification.},
 year = {2019}
}

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TY  - JOUR
T1  - Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC
AU  - Thierry Mvondo
Y1  - 2019/12/02
PY  - 2019
N1  - https://doi.org/10.11648/j.ijber.20190806.23
DO  - 10.11648/j.ijber.20190806.23
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 422
EP  - 438
PB  - Science Publishing Group
SN  - 2328-756X
UR  - https://doi.org/10.11648/j.ijber.20190806.23
AB  - This paper investigates the macroeconomic effects of Central African States Bank (BEAC) commitment to ensure its nominal anchoring when the underlying external reserves constraint occurs after an oil shock. Indeed, the current monetary agreements place external reserves at the heart of the cooperation between BEAC and the French Treasury, and their fluctuations are the main risks indicators to the durability of the cooperation between these two institutions: a system described as pegged to reserves which neither fully resembles a fixed exchange rate regime or a flexible exchange rate regime, much less an intermediate regime. To this end, there is a need to monitor their ability to cover a proportion of the central bank's liabilities in the short run by tithing the monetary conditions, in order to avoid drastic adjustment measures as devaluation. Therefore, as a result of the fall of these reserves below their long run threshold, the central bank essentially focused on their recovery. Our framework is a Markov-switching approach of the Smets and Wouters textbook model were we have modelled the dynamics of external reserves from the balance of payments identity and the simplified balance sheet of the central bank. The monetary policy rule is also augmented by the gap of reserves to their long run trend. Two scenarios are subsequently evaluated namely, a variation of the probability of occurrence of the constraint while maintaining that of leaving or, conversely, a variation of the probability of exit from the constraint by assuming that its occurrence is fixed. The results obtained show that at the approach of the constraint and in the presence of an oil shock, the behaviour of the central bank induces many undesired effects such as the fall in consumption, investment and production. Conversely, when the probability of exit from the constraint is high, the central bank adopts a somewhat passive behaviour, with a late reaction that makes the imbalances continue. Following the fact that (i) export revenue of the region are mainly composed of oil resources (84%), (ii) imports are rigid and, (iii) the oil price cannot be under control of CEMAC countries for competitiveness purpose, the paper highlights the need for permanent monetary discipline alongside economic diversification.
VL  - 8
IS  - 6
ER  -

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Thierry Mvondo

Department of Studies, Research and Statistics, Central African States Bank, Yaoundé, Cameroon

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Thierry Mvondo. (2019). Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC. International Journal of Business and Economics Research, 8(6), 422-438. https://doi.org/10.11648/j.ijber.20190806.23

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ACS Style

Thierry Mvondo. Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC. Int. J. Bus. Econ. Res. 2019, 8(6), 422-438. doi: 10.11648/j.ijber.20190806.23

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AMA Style

Thierry Mvondo. Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC. Int J Bus Econ Res. 2019;8(6):422-438. doi: 10.11648/j.ijber.20190806.23

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@article{10.11648/j.ijber.20190806.23,
  author = {Thierry Mvondo},
  title = {Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC},
  journal = {International Journal of Business and Economics Research},
  volume = {8},
  number = {6},
  pages = {422-438},
  doi = {10.11648/j.ijber.20190806.23},
  url = {https://doi.org/10.11648/j.ijber.20190806.23},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20190806.23},
  abstract = {This paper investigates the macroeconomic effects of Central African States Bank (BEAC) commitment to ensure its nominal anchoring when the underlying external reserves constraint occurs after an oil shock. Indeed, the current monetary agreements place external reserves at the heart of the cooperation between BEAC and the French Treasury, and their fluctuations are the main risks indicators to the durability of the cooperation between these two institutions: a system described as pegged to reserves which neither fully resembles a fixed exchange rate regime or a flexible exchange rate regime, much less an intermediate regime. To this end, there is a need to monitor their ability to cover a proportion of the central bank's liabilities in the short run by tithing the monetary conditions, in order to avoid drastic adjustment measures as devaluation. Therefore, as a result of the fall of these reserves below their long run threshold, the central bank essentially focused on their recovery. Our framework is a Markov-switching approach of the Smets and Wouters textbook model were we have modelled the dynamics of external reserves from the balance of payments identity and the simplified balance sheet of the central bank. The monetary policy rule is also augmented by the gap of reserves to their long run trend. Two scenarios are subsequently evaluated namely, a variation of the probability of occurrence of the constraint while maintaining that of leaving or, conversely, a variation of the probability of exit from the constraint by assuming that its occurrence is fixed. The results obtained show that at the approach of the constraint and in the presence of an oil shock, the behaviour of the central bank induces many undesired effects such as the fall in consumption, investment and production. Conversely, when the probability of exit from the constraint is high, the central bank adopts a somewhat passive behaviour, with a late reaction that makes the imbalances continue. Following the fact that (i) export revenue of the region are mainly composed of oil resources (84%), (ii) imports are rigid and, (iii) the oil price cannot be under control of CEMAC countries for competitiveness purpose, the paper highlights the need for permanent monetary discipline alongside economic diversification.},
 year = {2019}
}

Copy | Download

TY  - JOUR
T1  - Oil Shocks and Macroeconomic Effects of Occasionally Binding Constraint on External Reserves of CEMAC
AU  - Thierry Mvondo
Y1  - 2019/12/02
PY  - 2019
N1  - https://doi.org/10.11648/j.ijber.20190806.23
DO  - 10.11648/j.ijber.20190806.23
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 422
EP  - 438
PB  - Science Publishing Group
SN  - 2328-756X
UR  - https://doi.org/10.11648/j.ijber.20190806.23
AB  - This paper investigates the macroeconomic effects of Central African States Bank (BEAC) commitment to ensure its nominal anchoring when the underlying external reserves constraint occurs after an oil shock. Indeed, the current monetary agreements place external reserves at the heart of the cooperation between BEAC and the French Treasury, and their fluctuations are the main risks indicators to the durability of the cooperation between these two institutions: a system described as pegged to reserves which neither fully resembles a fixed exchange rate regime or a flexible exchange rate regime, much less an intermediate regime. To this end, there is a need to monitor their ability to cover a proportion of the central bank's liabilities in the short run by tithing the monetary conditions, in order to avoid drastic adjustment measures as devaluation. Therefore, as a result of the fall of these reserves below their long run threshold, the central bank essentially focused on their recovery. Our framework is a Markov-switching approach of the Smets and Wouters textbook model were we have modelled the dynamics of external reserves from the balance of payments identity and the simplified balance sheet of the central bank. The monetary policy rule is also augmented by the gap of reserves to their long run trend. Two scenarios are subsequently evaluated namely, a variation of the probability of occurrence of the constraint while maintaining that of leaving or, conversely, a variation of the probability of exit from the constraint by assuming that its occurrence is fixed. The results obtained show that at the approach of the constraint and in the presence of an oil shock, the behaviour of the central bank induces many undesired effects such as the fall in consumption, investment and production. Conversely, when the probability of exit from the constraint is high, the central bank adopts a somewhat passive behaviour, with a late reaction that makes the imbalances continue. Following the fact that (i) export revenue of the region are mainly composed of oil resources (84%), (ii) imports are rigid and, (iii) the oil price cannot be under control of CEMAC countries for competitiveness purpose, the paper highlights the need for permanent monetary discipline alongside economic diversification.
VL  - 8
IS  - 6
ER  -

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