Advanced Cyclical Turning Point Indicators for Inflation in the WAEMU

Overview

This research develops advanced cyclical turning point indicators for inflation in the West African Economic and Monetary Union through regime-switching econometric modeling. The study identifies distinct inflation regimes and examines the structural determinants of inflation dynamics within the monetary union, with implications for institutional responsibilities in price stabilization.

Methods and approach

The analysis employs Markov-Switching Vector Autoregression (MSVAR) models to detect and characterize inflation regimes within WAEMU. The approach incorporates exogenous variables including output gap measures, imported inflation proxies, and crude oil price dynamics alongside endogenous monetary variables to establish regime-dependent relationships. The modeling framework generates probabilistic regime identification alongside traditional quantitative inflation forecasting metrics to provide qualitative supplementary information about cyclical turning points.

Results

The estimation identified two distinct inflation regimes within WAEMU: a high-inflation regime and a low-inflation regime. Analysis of determinants reveals that primary exogenous drivers of regime transitions—including output gap fluctuations, imported inflation pressures, and international oil price movements—operate outside the direct control mechanisms available to the Central Bank of West African States. Conversely, traditional monetary policy instruments such as money supply adjustments demonstrate limited autonomous influence over regime dynamics.

Implications

The findings establish that inflation regime stability within WAEMU exhibits structural dependence on factors external to unilateral central bank policy instruments. This asymmetry between controllable monetary variables and determinative economic variables raises substantive questions regarding the institutional allocation of price stabilization responsibilities. The results suggest that effective price stability maintenance may require coordinated institutional involvement extending beyond monetary policy implementation to encompass fiscal policy coordination and external sector management across union member states.