## Quarterly Projection Model for the WAEMU

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### I. Introduction and institutional context
- Since institutional reform implemented in 2010, the Central Bank of West African States (BCEAO) modernized its monetary policy framework to focus primarily on price stability.
- Current institutional environment:
  - fixed exchange rate regime with capital controls;
  - implicit targets for the level of international reserves and inflation;
  - operational focus allowing the BCEAO to pursue price stability.
- Reform outcomes:
  - clarified objective of monetary policy (price stability instead of targeting net foreign assets);
  - established operational and formal independence of the BCEAO;
  - transferred monetary policy stance decisions to the Monetary Policy Committee (MPC);
  - increased reporting, transparency, and public information obligations.

### II. BCEAO monetary policy framework and recent WAEMU macro developments
- Monetary framework features:
  - peg of the CFA Franc (CFAF) to the euro;
  - explicit inflation target of 2 percent year-on-year with a margin of +/- 1 percent over a two-year horizon.
- Stylized macro facts and recent developments:
  - Correlation of inflation between WAEMU and euro zone: 0.77.
  - Period 2008Q1-2020Q2 summary statistics (Average in percent): WAEMU : 1.6; Euro zone : 1.4; Correlation: 0.77.
  - Since 1999, inflation in the WAEMU has hovered around an average of 2 percent per year.
  - WAEMU experienced a mild depreciation of the real effective exchange rate (REER) of 0.6 percent over the past decade.
  - Monetary management practices:
    - BCEAO monitors Currency Coverage Ratio (CCR) = foreign exchange reserves / demand monetary liabilities; WAEMU Treaty: MPC to act when CCR falls below 20% on average for three consecutive months (no formal CCR-targeting rule).
    - Policy instruments: policy interest rates within a corridor (Minimum Bid Rate — MBR floor; Maximum Lending Rate — MLR ceiling), reserve requirements, liquidity auctions against eligible collateral.
    - Ceiling rate currently set at 200 basis points above the minimum bid rate.
  - Interaction and empirical correlations (2015Q1 - 2019Q1) between IBR and contemporaneous Inf, Output_gap, CCR (selected values; t-statistics in parentheses):
    - IBR_t vs Output_gap_t: 0.409* (0.103)
    - IBR_t vs CCR_t: -0.419* (0.094)
    - IBR_t+1 vs CCR_t: -0.509** (0.044)
  - Policy implication: BCEAO faces an additional monetary policy trade-off relative to central banks under flexible exchange rates because strong reactions to shocks may jeopardize the peg.

- Macro aggregates (selected averages and ratios):
  - Real GDP average annual growth over 2012–2019: 6.3 percent.
  - Investment averaged 13 percent per year over 2012–2019 (versus 8.6 percent between 2000 and 2011).
  - Inflation averaged 1.2 percent between 2010 and 2019; euro area inflation averaged around 0.9 percent over the same period.
  - Inflation components: core inflation 48 percent of overall inflation (coefficient of variation 1.1); food products 43 percent; energy products 9 percent.
  - Overall budget deficit of the Union averages 2.9 percent of GDP over 2008-2019.
  - Over 2015–2018 average annual deficit: 3.5 percent.
  - Public debt at end-2019: 43.7 percent of GDP; external component: 67 percent of total.

### III. QPM-WAEMU model structure and specific features
- Model class and objectives:
  - semi-structural New-Keynesian quarterly projection model (QPM-WAEMU);
  - aims to reproduce WAEMU transmission mechanisms, BCEAO behavior, and provide medium-term forecasts and risk analysis.
- Specific aspects captured:
  - fixed exchange rate regime pegging regional currency to the euro;
  - reasonably effective capital controls and limited BCEAO capacity to influence money markets;
  - reaction function that allows the BCEAO to indirectly target FX reserves via a risk premium.
- Model core blocks (five blocks):
  - 1. aggregate demand block (IS curve);
  - 2. aggregate supply block (Phillips curve);
  - 3. uncovered interest rate parity condition;
  - 4. monetary policy reaction function;
  - 5. budget/fiscal block.
- Aggregate demand (IS) highlights:
  - output gap ŷ_t defined as deviation of log actual output from potential;
  - real monetary conditions index mci_t includes deviations of real interest rate r̂_t + credit risk premium cr_prem_t and real exchange rate deviation −ẑ_t;
  - foreign/global influence through ŷ_t* (global output gap) and fiscal impulse f_t_imp.
- New Keynesian Phillips curve and inflation decomposition:
  - inflation disaggregated into: underlying/core inflation (π_t_core), food inflation (π_t_food), energy inflation (π_t_nrg);
  - overall inflation aggregation (exact equation as in source):
    - πt = wt_nrg πt_nrg + wt_food πt_food + (1 − wt_nrg − wt_food) πt_core
  - core inflation hybrid Phillips curve depends on past and expected future core inflation, real marginal cost rmc_t, and supply shock ε_t_core.
- Exchange rate and UIRP:
  - forward-looking UIP (st = Et st+1 + (it* − it + premt)/4 + εt_s) reformulated to include persistence:
    - st = e1 (st−1 + 2/4 ∆s̅t) + (1−e1) Et st+1 + (it* − it + premt)/4 + εt_s, with e1 ∈ [0,1];
  - policy-adjusted parity with coefficient h2 reflecting rigidity: h2 = 1 fixed regime; h2 = 0 floating regime;
  - estimated h2 = 0.97 (reflecting fixed parity with slight variations).
- Monetary policy rule and risk premium (exact functional forms preserved in model):
  - UIP-implied target iUIP_t and BCEAO target it combine exchange-rate considerations, inflation gap Et πt+3 − πt_T, output gap ŷt, and risk-premium deviations (premt − prem̅);
  - estimated h1 = 0.43 indicates degree of BCEAO control over domestic money market.
  - risk premium equation (premt) depends on past premt, deviation of debt/GDP (bt − b_t_tar) with sensitivity p6, deviation of reserves resvt − resv_tar with sensitivity p7, and shock εt_prem; p6 was set at 0.01.
  - reserve dynamics resvt respond to past reserves, deviation from target resv_tar, interest rate deviations (it − īt), RER deviations (zt − z̅t), and shock εt_resv.

### IV. Calibration, data, and Bayesian estimation
- Data sample and sources:
  - quarterly sample Q1-2008 to Q2-2020;
  - WAEMU series from BCEAO: real GDP, HICP and components, weighted one-week interbank rate, CCR, overall budget deficit;
  - rest-of-world (G20) series from OECD; 3-month US T-bill, Brent crude price, nominal €/CFAF exchange rate from investing.org.
- Calibration and steady-state values (selected exact calibrated values and steady states):
  - calibrated p6 = 0.01 (sensitivity of country risk premium to debt/GDP deviations);
  - steady state parameters:
    - ∆sT = 0.0;
    - ∆z̅ = 0.0;
    - π̅* = 2.0;
    - π̅ = 2.0;
    - g̅Y = 6.5;
    - prem̅̅̅̅̅̅̅ = 2.0;
    - resv_t_star = 85.0 (Target of Currency Coverage Ratio (CCR));
    - b_t_tar = 45.0 (Target of public debt ratio);
    - i̅* = 2.0;
    - r̅ = 2.0;
    - rπ̅̅̅f = +1.0;
    - rπ̅̅̅core = -0.5.
- À priori distributions (selected):
  - b1 Normal average 0.9 sd 0.1 (persistence of output gap);
  - b2 Normal average 0.15 sd 0.01 (pass-through of real monetary conditions);
  - h2 Normal average 0.95 sd 0.1 (degree of rigidity of the exchange rate regime);
  - h1 Normal average 0.4 sd 0.1 (weight on exchange rate stability in interest rate rule).
- Estimated parameter modes (selected exact estimates and critical values from Table A.2.3):
  - b1 Mode 0.92 — Critical values 0.25% 0.71 — 97.5% 0.98.
  - b2 Mode 0.15 — Critical values 0.25% 0.13 — 97.5% 0.17.
  - b3 Mode 0.28 — Critical values 0.25% 0.27 — 97.5% 0.30.
  - b4 Mode 0.39 — Critical values 0.25% 0.34 — 97.5% 0.45.
  - b6 Mode 0.59 — Critical values 0.25% 0.58 — 97.5% 0.62.
  - a1 Mode 0.73 — Critical values 0.25% 0.64 — 97.5% 0.84.
  - a2 Mode 0.35 — Critical values 0.25% 0.14 — 97.5% 0.59.
  - a3 Mode 0.44 — Critical values 0.25% 0.12 — 97.5% 0.74.
  - a21 Mode 0.69 — Critical values 0.25% 0.81 — 97.5% 0.93.
  - a22 Mode 0.23 — Critical values 0.25% 0.08 — 97.5% 0.36.
  - a23 Mode 0.92 — Critical values 0.25% 0.90 — 97.5% 0.94.
  - a31 Mode 0.79 — Critical values 0.25% 0.76 — 97.5% 0.83.
  - a32 Mode 0.13 — Critical values 0.25% 0.11 — 97.5% 0.16.
  - h2 Mode 0.97 — Critical values 0.25% 0.95 — 97.5% 0.99.
  - g1 Mode 0.45 — Critical values 0.25% 0.23 — 97.5% 0.57.
  - h1 Mode 0.43 — Critical values 0.25% 0.30 — 97.5% 0.57.
  - p7 Mode 0.09 — Critical values 0.25% 0.077 — 97.5% 0.116.
  - ρ_resv Mode 0.76 — Critical values 0.25% 0.57 — 97.5% 0.92.
  - σ_εy Mode 0.71 — Critical values 0.25% 0.55 — 97.5% 1.01.
  - σ_εcore Mode 4.01 — Critical values 0.25% 3.33 — 97.5% 4.48.
  - σ_εfood Mode 9.79 — Critical values 0.25% 8.10 — 97.5% 12.31.
  - σ_εnrj Mode 8.54 — Critical values 0.25% 7.21 — 97.5% 10.89.

### V. Model validation, moments, and forecasting performance
- Comparison of observed vs model-generated moments (selected exact figures from Table 2):
  - Output gap: Obs. mean -0,69; Model mean -0,71; Obs. SD 0,77; Model SD 0,75.
  - Overall inflation rate: Obs. mean 1,60; Model mean 1,63; Obs. SD 2,08; Model SD 2,15.
  - Underlying inflation rate: Obs. mean 0,88; Model mean 0,95; Obs. SD 2,37; Model SD 1,93 — variance equality test p-value 0.09 (2.34*).
  - Food inflation rate: Obs. mean 2,66; Model mean 2,31; Obs. SD 5,93; Model SD 4,35 — variance equality test p-value 0.043 (3.13**).
  - Energy inflation rate: Obs. mean 1,24; Model mean 1,46; Obs. SD 4,86; Model SD 6,60 — variance equality test p-value 0.03 (0.54*).
  - Interest rate: Obs. mean 4,13; Model mean 4,10; Obs. SD 0,73; Model SD 0,69.
  - Exchange rate: Obs. mean 648,9; Model mean 649,0; Obs. SD 0,55; Model SD 0,52.
  - Reserves: Obs. mean 94,4; Model mean 95,3; Obs. SD 4,77; Model SD 4,68.
- Forecasting performance vs SVAR (selected RMSE comparisons from Table 3):
  - Inflation: QPM average RMSE 0.79; SVAR 1.33; QPM/SVAR ratio 0.59.
  - Output gap: QPM average RMSE 0.61; SVAR 1.19; ratio 0.52.
  - CCR: QPM average RMSE 4.20; SVAR 4.06; ratio 1.03.
  - Interest rate: QPM average RMSE 0.58; SVAR 0.61; ratio 0.95.
- Validation techniques used:
  - pseudo out-of-sample forecasts;
  - comparison of moments from data and model;
  - forecasting performance comparison against Structural VAR (SVAR);
  - analysis of impulse responses.
- Validation outcome: model performs well along validation dimensions and is usable by the BCEAO for shock identification, transmission analysis, and coherent medium-term forecasts that internalize WAEMU institutional features.

### VI. Impulse response simulations — transmission of six shocks (quantitative effects)
- Six shocks simulated: cost-push (supply), aggregate demand, monetary policy, fiscal shock, foreign reserves shock, global demand.
- A. Cost-push shock (1 percent increase in core inflation relative to equilibrium):
  - headline inflation mechanically increases by 0.6 percent;
  - monetary tightening and real exchange rate appreciation mitigate inflation over time;
  - trade balance deteriorates; reserves fall instantaneously then gradually recover; output falls; budget deficit and public debt ratios rise;
  - supply shocks show negative correlation between inflation and output gap; disinflation can be costly (sacrifice ratio).
- B. Aggregate demand shock (1 percent increase in aggregate demand):
  - general price level pressure ≈ 0.2 percent;
  - monetary authorities respond with an increase of almost 50 basis points in the target rate;
  - output returns to long-term equilibrium after 12 quarters;
  - inflation returns to target after 16 quarters;
  - exchange rate variations negligible (order of 10−3) due to h2 = 0.97;
  - demand shock reduces risk premium and public debt ratio.
- C. Monetary policy shock (one-off easing of 1percent cut in WAEMU interbank market rate):
  - instantaneous 1percent drop in BCEAO target rate increases liquidity and reduces CCR;
  - CCR decreases by 0.8 points after one quarter;
  - risk premium increases by almost 0.15 points;
  - monetary easing lowers fiscal deficit ratio via countercyclical effects; public debt ratio declines via higher GDP and improved deficit;
  - under hypothetical floating regime, depreciation would limit reserve/risk-premium impacts but produce pass-through to inflation/output.
- D. Fiscal policy shock (1 percentage point increase in budget deficit):
  - increases debt/GDP ratio while temporarily stimulating output and marginally increasing inflation;
  - BCEAO tightens monetary policy as risk premium rises over medium term.
- E. Foreign exchange reserve shock (unexpected −5 percentage points drop in CCR):
  - increases risk premium; BCEAO tightens policy by increasing target rate by 50 basis points;
  - activity and inflation reduce initially; real exchange rate depreciates, improving competitiveness;
  - reserves replenished after 6 quarters.
- F. Global demand shock (1 percent contraction):
  - domestic output gap widens by more than 0.6 percentage points after three quarters; general price level falls (section truncated in source).

### VII. Forecast exercise (2020Q3-2022Q3) — assumptions and outcomes
- Forecast design:
  - eight-quarter conditional forecast horizon: 2020Q3-2022Q3;
  - forecasts conditional on assumptions about external and domestic environment and policy orientation.
- External assumptions (selected exact assumptions):
  - "The output gap is kept negative until the second quarter of 2022, when the world economy could return to its production potential."
  - "The interest rate on US Treasury bills has been on a downward trend from 0.09 percent to 0.03 percent, over eight quarters."
  - "The price of crude oil would gradually increase to $60."
  - "Global inflation (G20 countries) should quickly return to its level of the last five years, i.e., 3.5 percent."
- Domestic assumptions (selected exact assumptions and BCEAO measures listed exactly as in source):
  - pandemic-related rapid fall in domestic demand and decline in production potential with slight domestic price increases in late 2020;
  - fiscal policy: "the budget deficit and public debt targets have been temporarily raised by 3 to 5 percentage points in 2020."
  - BCEAO monetary measures:
    - i) making unlimited liquidity offers on refinancing windows at a fixed rate equivalent to the key floor rate,
    - ii) lowering the floor rate by 50 basis points,
    - iii) allowing the postponement of claims for companies and individuals affected by the health crisis,
    - iv) relaxing the prudential system and
    - v) promoting digital means of payment.
  - for 2021: continued unlimited liquidity injection operations at a fixed rate; interest rates remain at low levels in 2021.
  - internal fiscal path assumptions:
    - "the budget deficit to GDP ratio is set at 5 percent in 2020 and 4 percent in 2021 and 2022."
  - monetary easing shock assumption:
    - "The easing of monetary policy beyond the levels required by the central bank's reaction function allows for a negative shock to the target interest rate of -2.5 percentage points."
- Forecast results (exact reported outcomes):
  - Inflation: "2.1 percent in 2020" and "2.2 percent in 2021." "The inflation rate is expected to rise in 2022 and 2023."
  - Real GDP growth: "0.7 percent" in 2020; rebound "4 percent" in 2021; acceleration "5.5 percent" in 2022.
  - Monetary issuance coverage by foreign exchange reserves:
    - "The coverage rate of monetary issuance by foreign exchange reserves should remain below the 80 percent mark until 2022 before rising slightly in 2023."
    - "It would evolve in the medium term around 75percent."
  - Monetary policy path:
    - short term: accommodating in 2021;
    - from 2022: gradual tightening with an increase in the target interest rate to approach its neutral level, driven by evolution of foreign exchange reserves.
  - Forecast caveat: "The interest rate forecast is not a commitment to future decisions by the Central Bank. Rather, it is the expected path of the interest rate if all assumptions materialize as expected."
- Additional forecast note: projected return to long-run equilibrium of the output gap and inflation horizon noted as "almost 16 quarters."

### VIII. Policy implications, uses, and limitations
- Policy applications and benefits:
  - produces reaction functions to shocks to inform BCEAO policy decisions;
  - provides a basis for structuring debates on policy choices, risk definition, and effects of discretionary policies;
  - allows counterfactual exercises on alternative policies, enhancing transparency in decisions and communication;
  - serves as a guide for measuring potential economic effects of BCEAO decisions and understanding policy trade-offs.
- Key trade-offs highlighted:
  - easing monetary policy to support activity exerts downward pressure on foreign exchange reserves and increases external vulnerability; maintaining the peg imposes constraints on monetary stimulus.
- Model limitations explicitly listed:
  - "does not explicitly integrate balance of payments flows or monetary variables."
  - aggregate demand "could be disaggregated into agricultural and non-agricultural components, given the weight of the primary sector in the economy."

### IX. Sensitivity analysis and robustness
- Sensitivity to calibration of p6 (country risk premium sensitivity to debt/GDP deviations):
  - p6 calibrated at 0.01 after sensitivity analysis in Annex 3.
  - Higher p6 values (e.g., p6 = 0.1 or p6 = 0.5) produce stronger responses of main variables and monetary policy reactions inconsistent with WAEMU historical behavior.
  - Conclusion: calibrated p6 lies within low values best capturing WAEMU economic history.

### X. Conclusions and model purpose
- The QPM-WAEMU is a semi-structural neo-Keynesian model calibrated with literature, off-model econometric estimates, and Bayesian estimation.
- Validation exercises (data consistency, pseudo out-of-sample forecasts, impulse simulations) show good forecasting ability for key variables under the single-scenario assumptions used.
- The model captures monetary policy transmission and shocks affecting the monetary union and can support monetary policy communication while clarifying constraints and trade-offs.

*Source: wpiea2022215-print-pdf — Quarterly Projection Model for the WAEMU (excerpts provided).*

### References ..............................................................................................

### Quarterly Projection Model for the WAEMU

### I. Introduction and context
- Since institutional reform implemented in 2010, the West African Economic and Monetary Union (WAEMU) has experienced a major turning point regarding monetary policy.
- The reform allowed the Central Bank of West African States (BCEAO) to modernize its monetary policy framework, bringing it closer to international best practices.
- The current institutional environment is characterized by:
  - a fixed exchange rate regime with capital controls;
  - implicit targets for the level of international reserves and inflation;
  - an operational focus that allows the BCEAO to pursue the main objective of price stability.
- The reform clarified the objective of monetary policy, which now focuses primarily on price stability instead of targeting net foreign assets in the context of fixed exchange rate regime.
- The reform established the operational and formal independence of the BCEAO by giving it the means to strengthen its credibility and the effectiveness of its action.
- The stance of monetary policy is now entrusted to a new internal body of the Central Bank, the Monetary Policy Committee (MPC), rather than to a political body as before.
- The reform also imposes new obligations on the BCEAO, notably in terms of reporting to the state authorities, transparency vis-à-vis the market, and information for the public.

### III. QPM-WAEMU model description and specific features
- The study presents a semi-structural New-Keynesian quarterly projection model (QPM) for the WAEMU region (QPM-WAEMU) that accounts for the main specific economic characteristics of the regional economy.
- Similar models have been used by several central banks in emerging and developing countries and in IMF technical assistance contexts (examples cited include Andrle et al. (2013); Dizioli and Schmittmann (2015); Botha et al. (2017); Musil et al. (2018); Laxton et al. (2018); and Baksa et al. (2020)). Mæhle et al. (2021) describes IMF capacity development work on FPAS.
- Specific aspects captured by QPM-WAEMU:
  - the fixed exchange rate regime that pegs the regional currency to the Euro;
  - reasonably effective capital controls and, consequently, some (limited, imperfect) capacity of the BCEAO to influence money markets in the WAEMU countries;
  - a reaction function that allows the BCEAO to de facto indirectly target the level of foreign exchange (FX) reserves through the incorporation of a risk premium in the monetary policy decision rule.
- Modeling detail:
  - The risk premium is modeled as a decreasing function of foreign exchange reserves relative to a threshold.

### Model validation, uses, and policy relevance
- Model validation techniques employed:
  - pseudo out-of-sample forecasts;
  - comparison of moments from the data and the model;
  - forecasting performance comparison against a Structural VAR (SVAR) benchmark;
  - analysis of impulse responses.
- Validation outcomes and model performance:
  - The model performs well along all validation dimensions and can therefore be used by the BCEAO to identify the main macroeconomic shocks hitting the WAEMU, analyze transmission channels, and produce coherent medium-term forecasts that internalize the main features of the WAEMU institutional set up, including the behavior of the central bank.
- Policy applications and benefits:
  - Produces reaction functions to shocks that can help inform the BCEAO’s policy decisions.
  - Provides a basis for structuring debates on the choice of relevant policy actions, the definition of associated risks, and the effects of discretionary policies.
  - Allows for counterfactual exercises regarding alternative policies, enhancing transparency in policy decisions and communication (Alichi et al., 2015).
  - Serves as a guide for the BCEAO to measure and track the potential economic effects of its decisions and to understand policy trade-offs.

### Organization of the remainder of the paper
- Section II describes the BCEAO's monetary policy framework and provides an overview of the main recent macroeconomic developments in the WAEMU area.
- Section III describes the QPM-WAEMU model.

*Source: wpiea2022215-print-pdf - References ..............................................................................................*

### Section IV focuses on the calibration and parameter estimation procedure and discusses the

### wpiea2022215-print-pdf - Section IV focuses on the calibration and parameter estimation procedure and discusses the

### Section IV: Calibration and parameter estimation (section focus)
- Section IV focuses on the calibration and parameter estimation procedure and discusses the performance of the model in terms of its ability to match data from the WAEMU and produce forecasts that compare well with those produced by a SVAR.
- Section V analyses the dynamic properties of the model through impulse response functions.
- Section VI discusses out-of-sample forecasts of key macroeconomic variables based on a set of assumptions about the international environment and the orientation of domestic policies to combat the effects of the Covid-19 pandemic.
- The concluding remarks are presented in Section VII.

### II. THE BCEAO’S MONETARY POLICY FRAMEWORK AND RECENT MACROECONOMIC DEVELOPMENTS IN THE WAEMU

### A. A monetary policy framework based on fixed exchange rate and capital controls
- The BCEAO is the central bank for the eight countries in the WAEMU zone and conducts the single monetary policy, payment systems management, foreign exchange reserve management, banking supervision, and financial stability.
- The BCEAO’s primary objective is price stability (cf. Article 8 of its Statutes).
- The BCEAO operates within a monetary policy framework based on:
  - Pegging the CFA Franc (CFAF) to the euro, and
  - An explicit inflation target of 2 percent year-on-year with a margin of +/- 1 percent over a two-year horizon.
- As a result of the peg:
  - WAEMU generally displays a relatively low and stable inflation rate, closely following the inflation of the euro zone (correlation coefficient of 0.77).
  - Since 1999, inflation in the WAEMU has hovered around an average of 2 percent per year.
  - Figure summary statistics (Period 2008Q1-2020Q2): Average in percent: WAEMU : 1.6; Euro zone : 1.4; Correlation: 0.77.
- The WAEMU experienced a mild depreciation of the real effective exchange rate (REER) of 0.6 percent over the past decade.
- To preserve the parity and retain some independent monetary policy power, the BCEAO:
  - Imposes controls of capital flows, especially outflows, and
  - Centralizes management of foreign reserves on behalf of WAEMU member-countries.
- Since the 1994 devaluation of the CFAF, the BCEAO carries out de facto FX reserve targeting via monitoring of the currency coverage ratio (CCR) — the ratio of foreign exchange reserves to the BCEAO’s demand monetary liabilities.
- The WAEMU Treaty provides that the Monetary Policy Committee (MPC) shall take appropriate measures to raise the CCR when it falls below 20%, on average, for three consecutive months (no formal CCR-targeting rule, but this provision exists).

### B. The implementation of monetary policy in the WAEMU
- Short-term shocks to the WAEMU and/or euro area can cause temporary deviations from the long-run equilibrium REER and affect price stability.
- Capital controls give the BCEAO some leeway to influence domestic interest rates and react to shocks to bring inflation toward the 2 percent target while securing the peg with the euro.
- Operational instruments and targets:
  - Policy interest rates within a corridor and reserve requirements to steer the average one-week interbank rate (IBR).
  - The IBR is an operational target alongside the nominal exchange rate.
  - The BCEAO aims to keep the IBR within a corridor formed by:
    - Minimum Bid Rate (MBR) — floor, used for weekly and monthly liquidity auctions; and
    - Maximum Lending Rate (MLR) — ceiling, banks can borrow at this rate from the BCEAO outside open-market operations.
  - Liquidity injections are implemented by auction against eligible collateral.
  - The main policy rates (floor and ceiling) and the reserve requirement ratio are set by the MPC at its quarterly meetings.
- Average Money Market Rate (AMMR):
  - Determined as the weighted average cost of liquidity offered by the Central Bank through open-market operations (one-week and one-month windows).
  - AMMR has always operated within the BCEAO’s interest rate corridor.
  - The IBR is often higher than the BCEAO ceiling rate (example: 2015–2019 when policy was tightened to ensure FX reserves compatible with maintaining the fixed parity).
- Key operational parameters and facts:
  - The ceiling rate is currently set at 200 basis points above the minimum bid rate.
  - During 2012–2015 the BCEAO rationed demand for refinancing and introduced quantitative limits per bank, contributing to a surge in interest rates in that period.
- Interaction between IBR, inflation, and CCR:
  - When CCR is high (sufficient FX reserves), the BCEAO’s commitment to the peg is less binding and key policy rate reacts more to inflation deviations from target.
  - When CCR falls below certain thresholds (notably observed when CCR falls below 85 percent), defense of the peg becomes binding and monetary policy is tightened significantly even if inflation is low.
  - Easing of policy in 2020 to limit COVID-19 impacts led to a decline in CCR, highlighting limited room for maneuver to support post-pandemic recovery given FX reserve constraints.
- Empirical correlations (2015Q1 - 2019Q1):
  - Table: Correlations between Inflation (Inf_t), Output Gap (Output_gap_t), CCR (CCR_t), and IBR at various leads (IBR_t, IBR_t+1, IBR_t+2, IBR_t+3). Values and t-statistics (in parentheses):
    - IBR_t:
      - Inf_t: -0.054 (0.837)
      - Output_gap_t: 0.409* (0.103)
      - CCR_t: -0.419* (0.094)
    - IBR_t+1:
      - Inf_t: -0.050 (0.854)
      - Output_gap_t: 0.438* (0.089)
      - CCR_t: -0.509** (0.044)
    - IBR_t+2:
      - Inf_t: -0.164 (0.558)
      - Output_gap_t: 0.375 (0.168)
      - CCR_t: -0.443* (0.098)
    - IBR_t+3:
      - Inf_t: -0.103 (0.725)
      - Output_gap_t: 0.226 (0.436)
      - CCR_t: -0.323 (0.260)
  - Note: The number of stars (***), (**), (*) indicates significance at the 1percent, 5percent and 10percent thresholds respectively. Figures in brackets correspond to the t-stat of the correlation coefficient.
  - Variables meaning: IBR per annum in percent; Inf = year-on-year inflation rate; Output_gap = output gap obtained using the HP filter in percent; CCR in percent.
- Policy implication:
  - BCEAO faces an additional monetary policy trade-off relative to central banks operating under flexible exchange rates: strong reactions to shocks that cause inflation and output deviations may not be possible without jeopardizing the peg under the current framework of a hard peg plus capital controls.

### C. Stylized facts: Recent macroeconomic developments in the WAEMU
- External and sectoral characteristics:
  - WAEMU is a small open economy with the euro zone as main partner.
  - Net importer of petroleum products and foodstuffs; major exporter of agricultural products (cocoa, gold, cotton, cashew nuts, palm oil, palm kernel oil, rubber, etc.).
- Economic growth:
  - Over 2012–2019, average annual growth of real GDP was 6.3 percent.
  - Investment drove growth: investment rose to an average of 13 percent per year over 2012–2019, compared with 8.6 percent between 2000 and 2011.
- Inflation:
  - Inflation is structurally low: averaging 1.2 percent between 2010 and 2019.
  - Euro area inflation averaged around 0.9 percent over the same period.
  - Component shares and variability:
    - Core inflation accounts for 48 percent of overall inflation; coefficient of variation 1.1.
    - Food products account for 43 percent; energy products account for 9 percent; both have coefficients of variation closer to 2.
- Fiscal balance and public debt:
  - WAEMU common budgetary rules since 1998; new framework in 2015 with convergence criteria to be met by 2019.
  - Fiscal convergence framework includes:
    - Public debt ceiling of 70 percent of GDP.
    - Operational rule setting budget deficit at maximum of 3 percent of GDP.
  - Overall budget deficit of the Union averages 2.9 percent of GDP over 2008-2019.
  - Over 2015–2018, a persistent fiscal stimulus: average annual deficit of 3.5 percent.
  - Public debt stands at 43.7 percent of GDP at the end of 2019.
  - External component of debt: 67 percent of total.

### III. THE MODEL (QPM-WAEMU) — model description (intro)
- Modeling objectives:
  - Be as faithful as possible to the economic reality of the WAEMU.
  - Provide medium-term macroeconomic forecasts and risk analysis for monetary policy formulation.
  - Reproduce the transmission mechanism of monetary policy, the behavior of the BCEAO, and the economic data.
- Model class and influences:
  - Semi-structural model broadly based on the third generation (3G) of models (Fukac and Pagan, 2010).
  - Combines New Keynesian features (nominal and real rigidities, aggregate demand role) with Real Business Cycle concepts of DSGE modelling, including rational expectations.
- The core of the model consists of five blocks (block list begins but full block list not included in supplied text).

*IMF Working Paper — Quarterly Projection Model for the WAEMU (excerpt).*

### 1. an aggregate demand block (IS curve),

### 1. an aggregate demand block (IS curve),

### Model structure (overview)
- The model comprises five blocks:
  - 1. an aggregate demand block (IS curve),
  - 2. an aggregate supply block (Phillips curve),
  - 3. an uncovered interest rate parity condition,
  - 4. a monetary policy reaction function,
  - 5. a budget/fiscal block.
- The model does not consider a breakdown of aggregate demand in sub components, nor does it explicitly include a separate block of equations for the balance of payments.

### A. Aggregate demand
- The aggregate demand relationship is based on the open economy version of the traditional IS curve and on the log-linearization of the Euler equation derived from the optimization of household consumption and includes the assumption of consumption patterns.
- Aggregate demand equation:
  - 푦̂
    푡
    =푏
    1
    푦̂
    푡−1
    +
    (
    1−푏
    1
    )
    푦̂
    푡+1
    −푏
    2
    푚푐푖
    푡
    + 푏
    3
    푦̂
    푡
    ∗
    + 푏
    6
    푓
    푡
    𝑖𝑚𝑝
    + 휀
    푡
    𝑦
    ,              (1)
- Definitions and components:
  - 푦̂
    푡
    is the output gap defined as the deviation of the logarithm of actual output from its potential or long-term level.
  - 푚푐푖
    푡
    is given by:
    - 푚푐푖
      푡
      =푏
      4
      (
      푟̂
      푡
      +푐푟_푝푟푒푚
      푡
      )
      +
      (
      1−푏
      4
      )(
      −푧̂
      푡
      ).
  - The variable 푚푐푖
    푡
    represents an index of real monetary conditions (ICMR), defined as a weighted average of:
    - the deviations of the real interest rate from its neutral level, 푟̂
      푡
      , plus the credit risk premium (푐푟_푝푟푒푚
      푡
      ) on loans,
    - and deviations of the real exchange rate (RER) from its trend, 푧̂
      푡
    .
  - The RER is defined as the nominal exchange rate (value in CFAF per unit of foreign currency represented by the euro), adjusted for the foreign and domestic price differential:
    - 푧
      푡
      =푠
      푡
      + 푝
      푡
       ∗
      − 푝
      푡
      where 푠
      푡
      is the (log of the) nominal euro/CFAF market exchange rate (this is the parity determined in the markets and not the official exchange rate), 푝
      푡
       ∗
      is the (log of the) foreign price index and 푝
      푡
      is the (log of the) of the price level in the WAEMU zone.
    - An increase (decrease) of 푧
      푡
      reflects a depreciation (appreciation) of the real exchange rate (RER).
  - 푦̂
    푡
    ∗
    is the global output gap.
  - 푓
    푡
    𝑖𝑚𝑝
    represents the fiscal policy impulse (the effect of fiscal policy on the business cycle).

### B. New Keynesian Phillips curve
- The Phillips curve is made up of a block of four equations reflecting the dynamics of the inflation rate. Inflation is disaggregated into three components:

- 1. Underlying inflation:
  - 휋
    푡
    𝑐표푟푒
    =푎
    1
    휋
    푡−1
    𝑐표푟푒
    +
    (
    1−푎
    1
    )
    휋
    푡+1
    𝑐표푟푒
    +푎
    2
    푟푚푐
    푡
    +휀
    푡
    𝑐표푟푒
    ,                                               (2)
  - where:
    - 푟푚푐
      푡
      =푎
      3
      푦̂
      푡
      +
      (
      1−푎
      3
      )(
      푧̂
      푡
      −푟푝̂
      푡
      𝑐표푟푒
      ).

- 2. Food inflation:
  - 휋
    푡
    𝑓표표푑
    =푎
    21
    휋
    푡−1
    𝑓표표푑
    +
    (
    1−푎
    21
    )
    휋
    푡+1
    𝑓표표푑
    +푎
    22
    푟푚푐
    푡
    𝑓표표푑
    +휀
    푡
    𝑓표표푑
    ,                              (3)
  - where:
    - 푟푚푐
      푡
      𝑓표표푑
      =푎
      23
      (푟푝̂
      푡
      𝑊퐹푂푂퐷
      +푧̂
      푡
      −푟푝̂
      푡
      𝑓표표푑
      )+
      (
       1−푎
      23
      )
      푦̂
      푡
      .

- 3. Energy inflation:
  - 휋
    푡
    𝑛푟푔
    =푎
    31
    휋
    푡−1
    𝑛푟푔
    +
    (
    1−푎
    31
    )
    휋
    푡+1
    𝑛푟푔
    +푎
    32
    푟푚푐
    푡
    𝑛𝑟𝑔
    +휀
    푡
    𝑛𝑟𝑔
    ,                                       (4)
  - where:
    - 푟푚푐
      푡
      𝑛𝑟𝑔
      =푟푝̂
      푡
      𝑊푂퐼퐿
      +푧̂
      푡
      −푟푝̂
      푡
      𝑛푟𝑔
      .

*Source: wpiea2022215-print-pdf - 1. an aggregate demand block (IS curve),*

### 4. Overall inflation

### 4. Overall inflation

### Inflation definition and decomposition
- Overall inflation (휋t) is the weighted average of three components (equation (5)):
  - underlying/core inflation (휋t_core)
  - food inflation (휋t_food)
  - energy inflation (휋t_nrg)
- Equation (5) (as in the source) expresses this aggregation exactly:
  - 휋t = wt_nrg 휋t_nrg + wt_food 휋t_food + (1 − wt_nrg − wt_food) 휋t_core

### Phillips curves and real marginal cost
- Core inflation dynamics follow a hybrid Phillips curve (equation (2)) that depends on:
  - past core inflation (휋t−1_core)
  - expected future core inflation (Et 휋t+1_core)
  - real marginal cost (rmc_t)
  - the supply shock εt_core
- The real marginal cost of firms is a weighted average of:
  - the RER gap (ẑt)
  - the output gap (ŷt)
  - it also depends on relative prices (r p̂t variables) to reflect substitution/arbitrage
- The coefficient a2 measures the influence of real marginal cost on inflation and indicates the "sacrifice ratio" (loss of output growth points required to reduce inflation by 1 percentage point)
- Analogous hybrid Phillips curves apply to the food and energy components (equations (3)–(4)), with:
  - 휋t_food, 휋t_nrg; rmc_t_food, rmc_t_nrg; relative price terms r p̂t_WFOOD, r p̂t_food, r p̂t_WOIL, r p̂t_nrg; shocks εt_food, εt_nrg

### Exchange rate, uncovered interest parity, and persistence
- Uncovered interest rate parity (UIRP) in a floating regime (equation (6)):
  - st = Et st+1 + (it* − it + premt)/4 + εt_s
  - st is nominal exchange rate (FCFA per euro)
  - it is annualized domestic nominal interest rate; it* is annualized foreign nominal interest rate
  - premt is the risk premium; εt_s is iid shock
  - dividing by 4 converts rates to quarterly frequency
- Pure forward-looking UIP (equation (6)) fails to capture observed exchange rate persistence
- UIP reformulated to include persistence (equation (7)):
  - st = e1 (st−1 + 2/4 ∆s̅t) + (1−e1) Et st+1 + (it* − it + premt)/4 + εt_s
  - ∆s̅t = π̅t − π̅t* + ∆z̅t
  - e1 ∈ [0,1] determines degree of exchange rate persistence; relations (6) and (7) are identical when e1 = 0
- Policy-adjusted parity when monetary authorities steer the exchange rate (equation (8)); coefficient h2 reflects exchange rate rigidity/flexibility:
  - extreme cases: h2 = 1 fixed regime; h2 = 0 floating regime
- For WAEMU:
  - parameter h2 is close to unity; estimated value h2 = 0.97 (reflecting fixed parity with slight variations)
  - CFAF has been pegged to the French franc and then to the euro; desired variation ∆sT = 0; long-term ∆z̅t = 0 (PPP)

### Monetary policy rule and risk premium
- UIP-implied target interest rate (equation (9)):
  - iUIPt = h1 [4 (Et st+1 − st) + it* + premt]
- Monetary policy rule (equation (10)) — central bank target rate it:
  - it = iUIPt + (1 − h1) { g1 it−1 + (1 − g1) [i_t^n + g2 (Et πt+3 − πt_T) + g3 ŷt + g4 (premt − prem̅) ] } + εt_i
  - it is BCEAO target (annualised one-week interbank rate); i_t^n is neutral interest rate; πt_T is inflation target; prem̅ is steady-state risk premium; εt_i is monetary policy shock
- Coefficient interpretations:
  - h1 indicates degree of control BCEAO exercises over domestic money market
    - h1 = 0: issuing bank retains full control
    - h1 = 1: monetary policy ineffective as target rate adjusts to anchor currency country
  - Estimated value: h1 = 0.43
- Risk premium equation (equation (11)):
  - premt = ρ_prem premt−1 + (1 − ρ_prem) prem̅ + p6 (bt − b_t_tar) − p7 (resvt − resv_tar) + εt_prem
  - resvt is currency coverage ratio (CCR) = foreign exchange reserves / Central Bank demand liabilities
  - target CCR resv_tar implicitly set by BCEAO
  - a fall in reserves from target increases premt and triggers monetary response
  - debt/GDP deviation (bt − b_t_tar) affects premt with sensitivity p6, expected much lower than sensitivity to reserves (p6 ≪ p7)
  - parameter choices and data:
    - p6 was set at 0.01
    - public debt: 50.4 percent of GDP in 2020
    - composition: 44.1 percent of total debt is concessional; 69 percent of external debt is concessional
- Reserve dynamics (equation (12)):
  - resvt = ρ_resv resvt−1 + (1 − ρ_resv) resv_tar + p8 (it − īt) + p9 (zt − z̅t) + εt_resv
  - channels: interest rates, import demand, external borrowing, government external mobilization

### Fiscal block and public finance interactions
- Cyclical deficit dynamics (equation (13)):
  - cdt = ρ_FP (cdt−1 − p4 ŷt) + (1 − ρ_FP) (cd_t_tar − p2 btd ev) + εt_cd
  - btd ev = p21 (bt − b_t_tar) + (1 − p21) Et bt+1_dev
  - cd_t_tar is deficit (% of GDP) that stabilises debt/GDP ratio
  - deficit reacts partly countercyclically via p4 and adjusts when debt/GDP deviates from target
- Fiscal impulse (푓t_imp) defined as change in cyclical deficit plus shock:
  - f t_imp = (cdt − cdt−1) + εt_fimp
  - positive (negative) fiscal impulse corresponds to increase (decrease) in cyclical deficit
- Primary deficit and total deficit:
  - pd t = cd t + εt_pd  (equation (14))
  - def t = pd t + id t  (equation (15)) where idt is interest on debt
- Public debt dynamics (equation (16)):
  - bt = bt−1 / (1 + (πt + gt)) + def t
  - gt is growth rate of real GDP

### Data, calibration, and Bayesian estimation
- Data:
  - quarterly sample: Q1-2008 to Q2-2020
  - WAEMU series: real GDP, HICP and its food/energy/underlying components, nominal interest rate (weighted one-week interbank), currency coverage rate, overall budget deficit — sourced from BCEAO
  - Rest-of-world (G20): real GDP, CPI, food price index — OECD
  - 3-month US T-bill rate, Brent crude price, nominal exchange rate €/CFAF — investing.org
  - EU budget deficit series were annual and interpolated quarterly via linear match-last interpolation
- Calibration and estimation:
  - some parameters calibrated using non-model analysis and central bank practices; others estimated by Bayesian methods
  - estimated parameter h2 = 0.97 (fixed parity), h1 = 0.43
  - parameter p6 chosen at 0.01 based on WAEMU context and robustness checks (sensitivity analysis in Annex 3)
  - confidence intervals (Table A.2.3) show estimated parameters significantly different from zero at the 5percent level

### Model validation: moments, forecasting, and comparisons
- Comparison of observed vs model-generated moments (selected values from Table 2):
  - Output gap: Obs. mean -0,69; Model mean -0,71; Obs. SD 0,77; Model SD 0,75
  - Overall inflation rate: Obs. mean 1,60; Model mean 1,63; Obs. SD 2,08; Model SD 2,15
  - Underlying inflation rate: Obs. mean 0,88; Model mean 0,95; Obs. SD 2,37; Model SD 1,93 — variance equality test p-value 0.09 (2.34*)
  - Food inflation rate: Obs. mean 2,66; Model mean 2,31; Obs. SD 5,93; Model SD 4,35 — variance equality test p-value 0.043 (3.13**)
  - Energy inflation rate: Obs. mean 1,24; Model mean 1,46; Obs. SD 4,86; Model SD 6,60 — variance equality test p-value 0.03 (0.54*)
  - Interest rate: Obs. mean 4,13; Model mean 4,10; Obs. SD 0,73; Model SD 0,69
  - Exchange rate: Obs. mean 648,9; Model mean 649,0; Obs. SD 0,55; Model SD 0,52
  - Reserves: Obs. mean 94,4; Model mean 95,3; Obs. SD 4,77; Model SD 4,68
  - Notes: Equality tests use F-test; stars denote rejection at 10percent (*), 5percent (**), 1percent (***)
- Pseudo out-of-sample forecasting (eight quarters) shows good forecasting capability overall; model particularly accurate for small shocks
- QPM vs SVAR RMSE comparison (Table 3 — selected insights):
  - Inflation: QPM average RMSE 0.79; SVAR 1.33 — QPM/SVAR ratio 0.59 (<1 indicates QPM more precise)
  - Output gap: QPM average RMSE 0.61; SVAR 1.19 — ratio 0.52
  - CCR (currency coverage ratio): QPM average RMSE 4.20; SVAR 4.06 — ratio 1.03 (SVAR slightly better)
  - Interest rate: QPM average RMSE 0.58; SVAR 0.61 — ratio 0.95

### Impulse response simulations — shock transmission and quantitative effects
- Six shocks simulated: cost-push (supply), aggregate demand, monetary policy, fiscal shock, foreign reserves shock, global demand
- A. Cost-push shock:
  - simulated by 1 percent increase in core inflation relative to equilibrium
  - headline inflation mechanically increases by 0.6 percent
  - monetary tightening and real exchange rate appreciation mitigate inflation over time
  - trade balance deteriorates; reserves fall instantaneously then gradually recover; output falls; budget deficit and public debt ratios rise
  - supply shocks show negative correlation between inflation and output gap; disinflation can be costly in terms of the sacrifice ratio
- B. Aggregate demand shock:
  - 1 percent increase in aggregate demand relative to long-term level → general price level pressure ≈ 0.2 percent
  - monetary authorities respond with an increase of almost 50 basis points in the target rate
  - output returns to long-term equilibrium after 12 quarters
  - inflation returns to target after 16 quarters
  - exchange rate variations negligible (order of 10−3) due to h2 = 0.97
  - demand shock reduces risk premium and public debt ratio
- C. Monetary policy shock:
  - Simulated: one-off easing of 1percent cut in WAEMU interbank market rate (IBR)
  - Under fixed regime (h2 = 0.97, h1 = 0.43; blue curves) vs flexible hypothetical (h2 = 0, h1 = 0; red curves)
  - Instantaneous 1percent drop in BCEAO target rate increases liquidity and reduces currency coverage rate (CCR)
  - CCR decreases by 0.8 points after one quarter
  - Risk premium increases by almost 0.15 points
  - Monetary easing lowers fiscal deficit ratio via countercyclical effects; public debt ratio declines via higher GDP and improved deficit
  - Under floating regime, depreciation would limit reserve/risk-premium impacts but produce pass-through to inflation/output
- D. Fiscal policy shock:
  - 1 percentage point shock to budget deficit (expansionary fiscal policy decoupled from cycle)
  - Increases debt/GDP ratio while temporarily stimulating output and marginally increasing inflation
  - BCEAO tightens monetary policy as risk premium rises over medium term
- E. Foreign exchange reserve shock:
  - Unexpected decrease in coverage rate by −5 percentage points (e.g., sudden drop in capital inflows)
  - Increases risk premium; BCEAO tightens policy by increasing the target rate by 50 basis points
  - This reduces activity and inflation initially; real exchange rate depreciates, improving competitiveness
  - Reserves are replenished after 6 quarters
- F. Global demand shock:
  - 1 percent contraction in global demand → domestic output gap widens by more than 0.6 percentage points after three quarters; general price level falls (section truncated in source)

*Italic source: IMF Working Papers — Quarterly Projection Model for the WAEMU (chapter 4: Overall inflation; source PDF: wpiea2022215-print-pdf — provided content).*

### 0.2 percent and a decline in foreign exchange reserves. To promote a recovery in activity, the

### wpiea2022215-print-pdf - 0.2 percent and a decline in foreign exchange reserves. To promote a recovery in activity, the

### VI. FORECAST — purpose and modeling approach
- The QPM model is designed to forecast paths for the Central Bank's target interest rate that are consistent with macroeconomic stability objectives over an eight-quarter period (2020Q3-2022Q3).
- Forecasts are conditional on projection assumptions for external and internal variables rather than unconditional projections.

### A. Assumptions about the Foreign Economy and International Prices
- Global pandemic shock and policy response:
  - Central banks (FED and ECB) eased monetary policy from March 2020 and announced continuation of an accommodating stance, maintaining key rates at (or close to) zero by 2022.
- Specific international-level assumptions:
  - a) "The output gap is kept negative until the second quarter of 2022, when the world economy could return to its production potential."
  - b) "The interest rate on US Treasury bills has been on a downward trend from 0.09 percent to 0.03 percent, over eight quarters."
  - c) "The price of crude oil would gradually increase to $60."
  - d) "Global inflation (G20 countries) should quickly return to its level of the last five years, i.e., 3.5 percent."

### B. Assumptions about the Domestic Economy (WAEMU)
- Pandemic effects domestically:
  - Rapid fall in domestic demand due to containment measures and decline in external demand; decline in production potential and a slight increase in domestic prices (especially food prices) in the last two quarters of 2020.
  - Prices expected to fall to the level of euro area prices due to the fixed parity between the currencies of the two areas.
- Fiscal policy:
  - WAEMU countries implemented countercyclical fiscal policies; "the budget deficit and public debt targets have been temporarily raised by 3 to 5 percentage points in 2020."
- BCEAO monetary policy measures (listed exactly as in source):
  - i) making unlimited liquidity offers on refinancing windows at a fixed rate equivalent to the key floor rate,
  - ii) lowering the floor rate by 50 basis points,
  - iii) allowing the postponement of claims for companies and individuals affected by the health crisis,
  - iv) relaxing the prudential system and
  - v) promoting digital means of payment.
- For 2021:
  - Central Bank planned to continue unlimited liquidity injection operations at a fixed rate; interest rates would remain at low levels in 2021.
- Internal environment assumptions:
  - a) "WAEMU countries are putting in place fiscal stimuli to mitigate the impact of the decline in domestic activity. To this end, the budget deficit to GDP ratio is set at 5 percent in 2020 and 4 percent in 2021 and 2022."
  - b) "The easing of monetary policy beyond the levels required by the central bank's reaction function allows for a negative shock to the target interest rate of -2.5 percentage points."

### C. Results — model forecasts and medium-term outlook
- Inflation forecasts:
  - "Inflation is expected to rise slightly in 2021 at 2.2 percent after 2.1 percent in 2020."
  - "The inflation rate is expected to rise in 2022 and 2023."
- Real GDP growth forecasts:
  - "After a sharp slowdown in economic growth in 2020 (0.7 percent), a rebound was expected in 2021 (4 percent), followed by a slight acceleration in 2022 (5.5 percent)."
- Monetary issuance coverage by foreign exchange reserves:
  - "The coverage rate of monetary issuance by foreign exchange reserves should remain below the 80 percent mark until 2022 before rising slightly in 2023."
  - "It would evolve in the medium term around 75percent." (original spacing retained)
  - Reserve levels depend on "the trade-off between the States in terms of financing their budget deficits in local currency or in foreign currency."
- Monetary policy path:
  - Short term: accommodating in 2021.
  - From 2022: gradual tightening with an increase in the target interest rate to approach its neutral level, driven by the evolution of foreign exchange reserves.
- Forecast caveat:
  - "The interest rate forecast is not a commitment to future decisions by the Central Bank. Rather, it is the expected path of the interest rate if all assumptions materialize as expected."

### Impulse-response and shock analysis (selected findings)
- One-off shocks to internal and external variables produce slight variations in inflation, which remains structurally low due to the pegging of the CFAF to the euro and long-term purchasing power parity.
- An easing of monetary policy exerts downward pressure on foreign exchange reserves and increases external vulnerability of the WAEMU.
- The trade-off: monetary policy to support the economy can be constrained by the need to build up a minimum stock of foreign exchange reserves to preserve the exchange rate targeting regime.

### VII. CONCLUSIONS — model purpose, performance, and limitations
- The study proposed a semi-structural neo-Keynesian QPM-WAEMU model calibrated using literature, off-model econometric estimates, and Bayesian estimation.
- Validation exercises included data consistency analysis, recursive pseudo out-of-sample forecasts, and impulse shock simulations.
- Performance:
  - The model shows good forecasting ability for key economic variables under the single-scenario assumption set used.
  - It captures transmission mechanisms of monetary policy and relevant shocks affecting the monetary union.
  - It can support communication on monetary policy stance and clarify constraints and trade-offs.
- Limitations (explicitly listed):
  - The model "does not explicitly integrate balance of payments flows or monetary variables."
  - Aggregate demand "could be disaggregated into agricultural and non-agricultural components, given the weight of the primary sector in the economy."

### Key exact numerical values and dates cited
- Forecast horizon: eight-quarter period (2020Q3-2022Q3).
- US Treasury bill rate path: "from 0.09 percent to 0.03 percent, over eight quarters."
- Oil price assumption: "$60."
- Global inflation (G20): "3.5 percent."
- Budget deficit to GDP ratio assumptions: "5 percent in 2020 and 4 percent in 2021 and 2022."
- Negative shock to target interest rate: "-2.5 percentage points."
- Inflation: "2.1 percent in 2020" and "2.2 percent in 2021."
- Real GDP growth: "0.7 percent" in 2020, "4 percent" in 2021, "5.5 percent" in 2022.
- Coverage rate references: "below the 80 percent mark until 2022", "around 75percent" medium term.
- Projected return to long-run equilibrium of the output gap and inflation: "almost 16 quarters."

*Source: IMF Working Paper — Quarterly Projection Model for the WAEMU (excerpts provided in the content unit).*

### Annex 2: Calibration, à priori distributions and estimated parameters

### Annex 2: Calibration, à priori distributions and estimated parameters

### Calibrated parameters (Table A.2.1)
- 푏5 — 0.7 — Persistence of the credit risk premium
- 푒1 — 0.5 — Forward-looking expectations on foreign exchange markets
- 푔2 — 1.0 — Weight given to inflation in the CB's reaction function
- 푔3 — 1.0 — Weight given to the output gap in the CB's reaction function
- 푝2 — 1.0 — Government response to deviations of the debt/GDP ratio from its target
- 푝3 — 0.1 — Sensitivity of the fiscal impulse to shocks to the debt target
- 푝4 — 0.3 — Deficit sensitivity to GDP fluctuations (countercyclical fiscal rule)
- 푝6 — 0.01 — Sensitivity of the country risk premium to deviations of the debt/GDP ratio from its target
- 푝8 — 0.9 — Sensitivity of the MCT to the target interest rate
- 푝9 — 0.5 — Sensitivity of the MER to the nominal exchange rate
- 휌푝푟푒푚 — 0.8 — Persistence of the risk premium
- 휎휀푠 — 1.5 — Volatility of the nominal exchange rate shock
- 휎휀푖 — 1.5 — Volatility of the target interest rate shock
- 휎휀푝푟푒푚 — 1.0 — Volatility of the risk premium shock
- 휎휀푟푒푠푣 — 1.0 — Volatility of the shock on the MCT

Steady state
- ∆푠푇 — 0.0 — Change in steady state nominal exchange rate
- ∆푧̅ — 0.0 — Change in steady state real exchange rate
- 휋̅∗ — 2.0 — Long-term foreign inflation rate
- 휋̅ — 2.0 — Inflation rate target
- 푔̅푌 — 6.5 — Steady state growth rateeconomic growth rate
- 푝푟푒푚̅̅̅̅̅̅̅ — 2.0 — Steady state risk premium
- 푟푒푠푣푡푎푟 — 85.0 — Target of Currency Coverage Ratio (CCR)
- 푏푡푡푎푟 — 45.0 — Target of public debt ratio
- 푖̅∗ — 2.0 — Equilibrium foreign interest rate
- 푟̅ — 2.0 — Equilibrium real interest rate
- 푖̅ — Eq. 10 — Equilibrium interest rate calculated from the equilibrium relationship of equation 10
- 푟휋̅̅̅푓 — +1.0 — Trend change in the relative food price
- 푟휋̅̅̅푐표푟푒 — -0.5 — Trend change in the relative core price

### À priori distribution of parameters (Table A.2.2)
- 푏1 — Normal — Average 0.9 — Standard deviation 0.1 — Persistence of the output gap
- 푏2 — Normal — Average 0.15 — Standard deviation 0.01 — Pass-through of real monetary conditions
- 푏3 — Normal — Average 0.3 — Standard deviation 0.01 — Impact of foreign demand on domestic production
- 푏4 — Beta — Average 0.4 — Standard deviation 0.03 — Weight of the real interest rate in the real marginal cost index
- 푏6 — Normal — Average 0.6 — Standard deviation 0.01 — Impact of the fiscal impulse on the output gap
- 푎1 — Normal — Average 0.8 — Standard deviation 0.25 — Persistent core inflation
- 푎2 — Normal — Average 0.2 — Standard deviation 0.2 — Impact of rmct on core inflation
- 푎3 — Normal — Average 0.6 — Standard deviation 0.2 — Share of imported goods in marginal business costs (1−푎3)
- 푎21 — Normal — Average 0.6 — Standard deviation 0.1 — Persistent food inflation
- 푎22 — Beta — Average 0.5 — Standard deviation 0.15 — Impact of real marginal cost on food prices
- 푎23 — Beta — Average 0.9 — Standard deviation 0.01 — Weight of relative food prices and the output gap on the 푟푚푐푡 food
- 푎31 — Beta — Average 0.7 — Standard deviation 0.03 — Energy inflation persists
- 푎32 — Beta — Average 0.2 — Standard deviation 0.2 — Passthrough of world oil prices on domestic prices
- ℎ2 — Normal — Average 0.95 — Standard deviation 0.1 — Degree of rigidity of the exchange rate regime
- 푔1 — Normal — Average 0.2 — Standard deviation 0.1 — Persistence of the target rate in the CB reaction function
- ℎ1 — Normal — Average 0.4 — Standard deviation 0.1 — Weight given to exchange rate stability in the interest rate rule
- 푝7 — Normal — Average 0.1 — Standard deviation 0.01 — Sensitivity of the risk premium to the MCT
- 휌푟푒푠푣 — Normal — Average 0.8 — Standard deviation 0.1 — Persistence of the MCT
- 휎휀푦 — Reverse Gamma — Average 0.5 — Standard deviation 1.0 — Volatility of the demand shock
- 휎휀푐표푟푒 — Reverse Gamma — Average 1.0 — Standard deviation 3.0 — Volatility of the shock to underlying inflation
- 휎휀푓표표푑 — Reverse Gamma — Average 5.0 — Standard deviation 3.0 — Volatility of the food inflation shock
- 휎휀푛푟푗 — Reverse Gamma — Average 8.0 — Standard deviation 3.0 — Volatility of the energy inflation shock

### Estimation of parameters (Table A.2.3)
- 푏1 — Mode 0.92 — Critical values 0.25% 0.71 — 97.5% 0.98
- 푏2 — Mode 0.15 — Critical values 0.25% 0.13 — 97.5% 0.17
- 푏3 — Mode 0.28 — Critical values 0.25% 0.27 — 97.5% 0.30
- 푏4 — Mode 0.39 — Critical values 0.25% 0.34 — 97.5% 0.45
- 푏6 — Mode 0.59 — Critical values 0.25% 0.58 — 97.5% 0.62
- 푎1 — Mode 0.73 — Critical values 0.25% 0.64 — 97.5% 0.84
- 푎2 — Mode 0.35 — Critical values 0.25% 0.14 — 97.5% 0.59
- 푎3 — Mode 0.44 — Critical values 0.25% 0.12 — 97.5% 0.74
- 푎21 — Mode 0.69 — Critical values 0.25% 0.81 — 97.5% 0.93
- 푎22 — Mode 0.23 — Critical values 0.25% 0.08 — 97.5% 0.36
- 푎23 — Mode 0.92 — Critical values 0.25% 0.90 — 97.5% 0.94
- 푎31 — Mode 0.79 — Critical values 0.25% 0.76 — 97.5% 0.83
- 푎32 — Mode 0.13 — Critical values 0.25% 0.11 — 97.5% 0.16
- ℎ2 — Mode 0.97 — Critical values 0.25% 0.95 — 97.5% 0.99
- 푔1 — Mode 0.45 — Critical values 0.25% 0.23 — 97.5% 0.57
- ℎ1 — Mode 0.43 — Critical values 0.25% 0.30 — 97.5% 0.57
- 푝7 — Mode 0.09 — Critical values 0.25% 0.077 — 97.5% 0.116
- 휌푟푒푠푣 — Mode 0.76 — Critical values 0.25% 0.57 — 97.5% 0.92
- 휎휀푦 — Mode 0.71 — Critical values 0.25% 0.55 — 97.5% 1.01
- 휎휀푐표푟푒 — Mode 4.01 — Critical values 0.25% 3.33 — 97.5% 4.48
- 휎휀푓표표푑 — Mode 9.79 — Critical values 0.25% 8.10 — 97.5% 12.31
- 휎휀푛푟푗 — Mode 8.54 — Critical values 0.25% 7.21 — 97.5% 10.89

### Sensitivity analysis to the calibration of parameter p6 (Annex 3)
- The annex analyzes model behavior under different values of p6 using impulse responses to standard aggregate demand and fiscal policy shocks.
- Aggregate demand shock:
  - Responses of main variables to a demand shock are overall stronger for larger values of p6.
  - For p6 = 0.5, the monetary policy response becomes very strong and counter intuitive considering the history of WAEMU economies.
  - For p6 = 0.1, responses of key variables are close to those under the calibrated value (p6 = 0.01) but the monetary policy response is not as expected.
- Fiscal policy shock (to the fiscal deficit):
  - Responses of variables under different values of p6 increase for higher values.
  - For p6 = 0.5 and p6 = 0.1, monetary policy reactions are not in line with recent economic history of WAEMU economies.
- Conclusion:
  - The calibrated value of p6 is within the range of (low) values that seem to capture best the economic history of WAEMU economies.

*Annex 2 and Annex 3 content from "Quarterly Projection Model for the WAEMU", IMF Working Papers (provided PDF excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022215-print-pdf.pdf_