Institutions for Macroeconomic Stability in Africa

Before discussing the type of institutions that can be designed for overcoming the credibility problem raised by monetary policy, this paper defines macroeconomic instability, showing that inflation is a crucial factor. The relationships between inflation and macroeconomic instability are analysed using a small Australian-type model, with rational expectations, where a too-high rate of inflation entails a continuum of equilibria, regarded as the root of macroeconomic instability. The credibility issue is then discussed in a simple optimal seignorage framework. Different institutional solutions, ranging from currency boards to IMF conditionality, are discussed.