A Monetary Stress Indicator for the Economic Community of West African States

This paper uses monetary stress indicators derived from a simple backward-looking Taylor rule to investigate macroeconomic convergence in the future monetary union of ECOWAS. The results we obtain support the notion of two distinct groups of countries (WAEMU and NON-WAEMU countries). We find a drastic reduction of monetary stress since the establishment of the convergence pact. The decomposition of monetary stress shows a decrease of stress due to diverging inflation rates since 1999 while notable asymmetries from cyclical output continue to persist across the ECOWAS member states. Monetary policy could be too accommodative for NON-WAEMU countries while it could be too tight for WAEMU countries implying that the future central bank target rate will not be consistent with the needs of every country member.