Endogenous Inflation in the UEMOA Zone: Trade-Off Between Inflation and Output

Abstract

Ensuring price stability is currently the priority objective of most central banks around the world, such as the BCEAO. However, one may wonder if the inflation targeting policy of between 1% and 3% is relevant? Several authors such as Kouame (2009), Combey and Nubupko (2010) have addressed this issue. Contrary to their approaches which use all the method of Hansen (1999) to highlight the endogenous level of inflation, this study proposes to highlight the existence of an endogenous threshold by the log quadratic model before its determination. The objective of this paper is to determine the level of endogenous inflation in WAEMU from the perspective of production. Our methodology, which is based on the criticisms of the Hansen model, consists in estimating two models: a log-linear model and a log-quadratic model. Using a robust estimation method, the Pooled Mean Group (PMG) on WAEMU data, it emerges on the one hand, the non-linearity of the Inflation-Production relationship in WAEMU, and the other hand, the level of endogenous inflation which maximizes production is estimated at 4.5%. Thus, the endogenous targeting policy of the BCEAO is not conducive to the stimulation of production and, by extension, to growth in the WAEMU space.