The Effects of Monetary Policy on Real Output: Evidence from West African Countries

This paper examines the effects of anticipated and unanticipated components of monetary policy on real output f or 12 countries in West Africa, using annual data from 1960 through 1990. There are two hypotheses that have been used in the literature to explain macroeconomic fluctuations. The classical rational expectations models by Lucas-Sargent-Wallace (LSW) posit that expected changes in money supply have no effects on real economic variables both in the short- and long-run. In contrast, the Natural Rate Hypothesis with short run Gradual Adjustment of Prices (NRH-GAP) by Fischer-Phelps-Taylor postulates that the anticipated monetary growth is not neutral in the short-run because of the rigidities in labor contracts and price inertia. The tests of the LSW and NRII-GAP hypotheses show that anticipated and unanticipated monetary policy affect real output growth in 11 of the 12 countries examined. The results generally support the NRH-GAP hypothesis. Furthermore, a formal test of money neutrality shows that money has no long-run effect on real output growth in these countries. Similarly, the test of the homogeneity restriction suggests that expectations do not matter in explaining the fluctuations in aggregate output.