Banks and Monetary Policy Transmission in the West African Economic and Monetary Union

Abstract

This paper aims at examining the role of banks in the transmission of the monetary policy in the West African Economic and Monetary Union (WAEMU). By using a simple theoretical model, this paper shows that improving the quality of institutions and an increase in competition strengthens the transmission of monetary policy while capital requirement behaves like an additional cost to the borrowers. Applying a dynamic panel estimator to a large sample of WAEMU banks, the paper finds that bank lending is sensitive to monetary policy and capital-constrained banks reduce further their lending following a tight monetary policy compared to less capital-constrained banks. Moreover, an improvement in the quality of institutions seems to strengthen the transmission of monetary policy.