Interest Rate Channel and Household Consumption: Evidence from the West African Monetary Zone

Abstract

In order to achieve macroeconomic stability, monetary authorities in the West African Monetary Zone (WAMZ) adopted an inflation targeting framework. The policy was facilitated by various monetary stability and control measures. The outcome of the policy effort was not significantly felt by the economies because the concentration was majorly on improving aggregate output with little or no attention to its important components such as household consumption. Thus, this study examines the effect of interest rate channel on household consumption in the WAMZ from 1986 to 2021. Based on the unit root results, the study employed the panel autoregressive distributed lags approach for regression analysis. And found that interest rate channel has no significant effect on household consumption expenditure in the short-run. But in the long-run, the interest rate channel significantly affected household consumption expenditure in the West African Monetary Zone. Therefore, the study concluded that in the long-run, the interest rate channel through nominal lending and deposit rates significantly affected household consumption in the Zone. In view of our findings, some policy implications were made to guide both the government and the monetary authorities in the Zone.

Keywords

• household consumption
• interest rate channel
• panel autoregressive distributed lag
• west african monetary zone