Monetary stability and financial development in Sub-Saharan countries

Abstract We analyze the interrelation between monetary stability and financial structure in 20 Sub-Saharan economies. Using a panel data set we estimate the impact of monetary stability and financial development on income per capita. Special interest is given to the conditions of the so-called CFA-countries, that have a fixed exchange rate vis-à-vis the French Franc. Is the impact of the financial system development in these countries bigger than in non-CFA countries? We measure monetary uncertainty using an auxiliary (G)ARCH model of monthly inflation. For financial development we take both the role of M2 as credit to the private sector into account. Our sample covers the years 1970-1997. We estimate growth regressions in three different forms: cross-section, interval, and a pooled model. We do find that inflationary uncertainty is relevant for growth of GDP per capita. Financial development is relevant in the low data-frequency models. The differences between CFA and non-CFA countries become apparent in the interval and pooled models. CFA-countries seem to rely more on credit in the interval model. Moreover, in the years 1985-1993 non-CFA countries seemed to suffer more from inflationary uncertainty