Monetary Policy, the Threshold of Profitability, and Dynamics of Private Investment

This paper contributes to the literature on optimal monetary policy, profitability thresholds, and private investment dynamics in the West African Economic and Monetary Union. Using data from 2000-2021, empirical analyses were conducted by estimating linear, asymmetric, and threshold effect dynamic panel error correction models. The empirical analyses show that low profitability of investments and high credit costs significantly constrain private investment in the West African Economic and Monetary Union. These findings suggest that an accommodative monetary policy cannot offset the high cost of credit, highlighting the need for additional measures to reduce credit costs and stimulate private investment. Moreover, the study finds that second-tier bank lending rates are more closely aligned with the interbank market rate than the central bank's policy rate, indicating potential inefficiencies in monetary policy transmission mechanisms within the West African Economic and Monetary Union. The results also demonstrate a positive relationship between the tax burden rate and private investment dynamics, underscoring the importance of tax policy in promoting private investment in the region. Finally, the study emphasizes the need for better coordination between monetary and tax policies within the West African Economic and Monetary Union to foster economic growth and improve private investment dynamics. Overall, the paper concludes that, a policy mix that balances the use of monetary and fiscal policies while considering their long-term impact could help stimulate private investment.