ABSTRACT
Introduction Monetary policy as a tool of macroeconomic management is focused on several specific objectives, including enhanced growth, domestic price stability, exchange rate stability, monetary stability, maintenance of a sound financial system, balance of payments equilibrium and ensuring adequate external reserves to safeguard the international value of the domestic currency. In the literature, the major factors that have shaped the focus of monetary policy are the specific macroeconomic environment, size and structure of the financial sector, as well as the stage of the development of the economy concerned. The primary goal of monetary policy is the attainment of price stability, to ensure predictable and conducive environment for sound economic decisions. The overriding goal of the West African Central Bank (WACB), as enshrined in its Statute, will be the maintenance of domestic price stability in the member countries. To pursue this objective successfully, the central bank should be provided with a high degree of instrumental independence, should demonstrate transparency and accountability in its operations and should abstain from financing government deficits. The Statute therefore provides that in pursuit of its primary goal of price stability, the bank shall be independent and free from the control of any government or institution and should not engage in lending to governments. The annual policy statement of the bank shall specify the inflation target. Also, the conduct of monetary policy should be based on market-based instruments and strategies. The selection of price stability as the primary goal of monetary policy does not imply that the other potential objectives mentioned earlier are no longer relevant. If price stability becomes the ultimate goal of monetary policy, the other goals of national economic policy could be simultaneously realized, given the positive contribution of the price stability to their own sustained achievement. The price stability objective of monetary policy is therefore not inconsistent with the need to minimize fluctuations in domestic output. Further, a central bank perceived by economic agents as having a strong commitment to price stability, in both short and medium term, provides an anchor for low inflation expectations, thus facilitating the achievement of growth with price stability.
