Private Consumption in The WAEMU Zone: Does Interest Rate Matter?

Abstract

This paper investigates the effect of interest rates on private consumption in the West African Economic and Monetary Union (WAEMU). After checking for unit root and co-integration, Error Correction Model is specified, and three estimators are performed: Mean Group, Pooled Mean Group and Dynamic Fixed-Effects. Hausman tests indicate that the Dynamic Fixed-Effects estimator is more efficient and consistent than others. Results suggest that there is no statistical evidence, both in short-run and long-run, impact of real and nominal saving interest rates on private consumption in the WAEMU region from 2006 to 2014. These finds imply that neither substitution effect, nor income effect, operate in this zone. However, the paper finds that the growth of private consumption is strongly depends positively in the long-run on the gross national disposable income and the credit to private sector ratio. The long-run income elasticity and semi-elasticity of liquidity constraints are statistically significant and average to 0.92 and 0.0085, respectively. These finds imply that there is a need for more proper financial market development and financial education policies implementation to have negative and significant impact of interest rates on private consumption in the WAEMU zone.

Keywords: Private Consumption, Interest Rates, WAEMU

* The views expressed in this paper are those of the author and should not be attributed to the Central Bank of West African States.