THE EFFECT OF MONETARY POLICY ON HOUSEHOLD CONSUPTION IN CAMEROON

By FUH GEORGE CHEO

MBA PROJECT MANAGEMENT

ABSTRACT

The study investigates the effect of monetary policy on household consumption in Cameroon between 1980 and 2010. The objective of the the study is to find out the relationship between monetary policy on household consumption in Cameroon and to recommend policies to improve on household consumption in Cameroon. The study uses secondary time series annual data from World Bank Group Development indicators for Cameroon.

The work uses economic model showing household final consumption expenditure as a function of monetary and quasi money growth, real interest rate, total reserve and Gross National Income per capita. Given the trends of the variables estimated results indicate that Total reserve as a ratio of GNP and GNI per capita positively and significantly affect household consumption. Monetary and quasi monetary growth has a negative impact on household consumption. Policy makers therefore need to encourage Total reserve and GNI per capita. It is therefore strongly recommended that instrument of monetary policy should be used in the economy as means of influencing household consumption.

Introduction

Monetary policy

Monetary policy is the process by which monetary authority of a country control the supply of money often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relative stable price and low unemployment. It is the process by which the government, central bank, or monetary authority of a country control; the supply of money, availability of money, cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

Problem statement

Amongst the instruments used in influencing the pace of economic activities in Cameroon are monetary instruments using monetary policies such as interest rates, bank rates, open market operations etc. to influence the supply of money.

However, the effectiveness of these monetary policy in accelerating household consumption in most of the CEMAC Region especially Cameroon is wanting. It is against this backdrop that this research study attempts to elucidate on how monetary policy has been influencing household consumption in Cameroon.

Research Questions

- Does monetary policy through its attributes such as real interest rate, total reserve and GNI per capita have a significant effect on household consumption in Cameroon?

- Whether money and quasi money growth has a relationship with household consumption in Cameroon?

OBJECTIVE OF THE STUDY

The main objective of the study is to investigate the effect of monetary policy on household consumption in Cameroon. Some specific objectives can be used to achieve this goal. These include

- To evaluate the role played by money and quasi money growth on household consumption in Cameroon.

- To analyze the relationship between real interest rate and household consumption in Cameroon.

- To assess the effect of GNI per capita on household consumption in Cameroon

- To recommend appropriate monetary policies to improve on household consumption in Cameroon.

Research Hypothesis

Ho: Monetary policy does not affect rural household consumption in Cameroon

LITERATURE REVIEW

Cameroon's economy is one of the fastest growing in sub-Saharan Africa. Oil extraction and agriculture, especially the cultivation of cocoa, are the most important sectors of the economy. Yet, in spite of abundance of natural resources, a third of the population lives below the poverty line. Red tape, high taxes, corruption and inequitable distribution of income are the main obstacles for Cameroon's further expansion.

In order to unravel such issues related to household consumption and monetary policy numerous studies have attempted to identify the effect of monetary policies. For instance Owyang and Walls (2004) have looked at the USA While Ramaswamy and Slok (1998) and Clement et al (2001) have studied European Countries. Their findings in general suggest different output effect in response to a common policy shock. Odior and Banuso (2011) explore the household welfare effect of macroeconomic volatility on private consumption expenditure in Nigeria. They established the extent to which volatility of macroeconomic does lead to a decline in consumption expenditure.

Burney et al (1991) examined the household expenditure in Pakistan in the period 184-1985 and the interpretation shows that consumption expenditures in the urban areas are higher than in the rural areas. Cassar and Cordina (2001) studied the behavioral trends of private consumption expenditure in Malta. They found out that the consumption expenditure in Malta has risen at a rapid in excess of increase in income. The rapid increase in consumption is believed to have been caused by factors such as boom in property prices, financial liberalization and demographic factors.

Research Methodology

Area of studies

The area of studies used in the studies is Cameroon, which is one of the central African countries found in the gulf of Guinea. With a surface area of 475442 square kilometers, it is surrounded by neighboring countries like Chad to the North, the Central African Republic to the east, Equatorial Guinea, Gabon and The republic of Congo Brazzaville to the south and Nigeria to the west (Aaron, 1999)

The economy of Cameroon is based on the three traditional sectors, agriculture industry and services. The agricultural sector which is made up of crop cultivation, livestock, fishery and forestry is the main stay of the economy accounting for about 29% of GDP, employing about 50% of the workforce of the country and generating more than half of the export earnings. Meanwhile the petroleum sector accounts for about 31% of the GDP of government revenue and export receipts employing about 15% of the working population.

DESCRIPTION OF DATA AND VARIABLE DEFINITIONS

Data for the studies is from secondary sources which include World Bank group annual Development reports, and Cameroon department of Demography and statistics.

The model used is the Keynesian consumption function which expresses the relationship between the dependent variables and the independent variables.

The data employed are time series covering the period of 1980 to 2010. The choice of the period is to better account for the monetary policy on household consumption in Cameroon amidst the series of economic and monetary phenomena that have taken place within the economy such as the economic crisis of late 1980s and the devaluation of the CFAF in the early 1990s respectively.

Dependent variable:

- Household consumption expenditure

Independent variables:

- Money and quasi money growth- Real interest rate- Total reserve.- Gross national income per capital

DEFINITION OF VARIABLES.

Variables are important in empirical analysis as they qualify concepts which are otherwise note easy to measure. In order to measure how monetary policy affect rural household consumption, in Cameroon a number of major variables will be considered.

Household final consumption expenditure.

Rural Household final consumption expenditure (formerly private consumption) is the market value of all goods and services, including durable products (such as cars, washing machines, and home computers), purchased by households. It excludes purchases of dwellings but includes imputed rent for owner-occupied dwellings. It also includes payments and fees to governments to obtain permits and licenses. Here, household consumption expenditure includes the expenditures of nonprofit institutions serving households

Money and quasi money growth

It comprises the sum of currency outside banks demand deposits other than those of the central government and the time, savings and foreign currency deposits of resident sectors other than the central government.

Real interest rate

Real interest rate here refers to the nominal interest rate minus inflation. It reflects the price of borrowing money at a given period. Higher interest rates will discourage the borrowing used to finance some types of consumption expenditure in the rural milieu and it increases the return on income diverted as saving into the financial

market. As such consumption decreases and saving increase. Lower interest rate works in the opposite manner.

Total reserve.

They are the sum of all deposits of that a depositing institution (banks building societies, credit unions, financial companies, insurance companies) is allowed to take into account as part of its legal reserve requirement. It includes cash in vault, adjustments for cash in transit to and from the central bank, current account reserve balance with the central bank.

Gross national income per capital

Gross national income (GNI) is the sum of value added by all resident producers plus any product taxes (less subsidies) not included in the valuation of output plus net receipts of primary income (compensation of employees and property income) from abroad. GNI per capita is gross national income divided by mid-year population. GNI is used as a proxy for household income

Presentation and discussion of results:

Statistical analysis and econometric analysis involved.

STATISTICAL TEST

Tools used involved:

- t-statistics; justifies whether the coefficient of the estimated parameters are significant at 10%

- F- ratio; test the overall significant of the R-square and to show the degree of reliability of the results obtained.

- standard error and R-square; to measure the degree of dispersion of the parameters around the true value of the estimated parameter.

ECONOMETRIC ANALYSIS

Involves testing for auto correlation and serial correlation between variables included in the research study, stationarity heteroscedasticity and co-integration.

CONCLUSION

All aspects of monetary policy included in the study are found to have a positive effect on household consumption in Cameroon except for money and quasi money growth which has a negative impact. Hence, monetary policy has a significant effect on household consumption. The variation is on the magnitude and direction of the effect or impact.

Overall real interest rate, money and quasi money growth , gross domestic income per capita and total reserve are found to account for approximately 70% of total variation of household consumption in Cameroon. This is statistically explicit. The most significant effect being that from GNI per capita. Hence government should put in place majors to increase GNI and the multiplier effect on Household consumption will be enormous.

References.

- Burney, N. A. & Khan, A. H. (1991). Household consumption patterns separately for the urban and the rural areas of Pakistan, Pakistan Development

Review June 22, 1991

- Clements, B. Kontolemis, Z.G. & Levy, J. (2001) Monetary Policy rules for the Euro area, Prescott (1977)

- Michael T. O. & Howard J. W. (2004). "Structural breaks and regional disparities in the transmission of monetary policy," Working Papers 2003-008, Federal Reserve bank of ST Louis.

- Jennifer Cassar and Gordon Cordina(2001). Consumption Expenditure in Malta, Behavioral trends in the 1990, Bank of Valletta Review, No. 23, Spring 2001.

- National Institute of Statistics. (2012). Household census results, Economic data, GeoHive, 2000-2012.

- Odior E. S. & Banuso F. B. (2011) Macroeconomic Volatility and Private Consumption Expenditure: Implication for Household Welfare:A Dynamic Macroeconometric Stochastic Model, European Journal of Social Sciences – Volume 20, Number 2 (2011).

- Ramaswamy, R. and Slok, T. (1998). The Real Effects of Monetary Policy in the European Union: What Are the Differences?Volume 45, Number 2 IMF STAFF PAPER QUARTERLY REPORT

- World bank Group (2001).Development indicators for Cameroon