How Relevant is Inflation Targeting in ECOWAS Common Currency Programme?

We examine the relevance of inflation targeting (IT) in the Economic Community of West African States’ (ECOWAS) common currency using the stability of money demand function to determine appropriate monetary policy framework. We employed annual data from 2003 to 2022 and autoregressive distributed lag (ARDL) bound test approach and find the presence of a long-run relationship between money demand function and its determinants. The CUSUM and CUSUM of square tests reveal the stability of money demand for the selected countries. Monetary targeting is more appropriate for ECOWAS since member countries have stable money demand. Based on the findings, we recommend the adoption of integrated inflation targeting framework, which involves setting flexible reserve money targets and interest rate corridors, sustaining a flexible exchange rate regime, and strengthening prudential supervision and regulation to promote financial system resilience against exchange rate shocks. This approach would promote policy transparency and accountability from inception. JEL Classification: FO2, E41, E52, E5