Impact Of Discretionary Monetary Policy On Inflation Case Study Of: Madagascar 1994-2015

In monetary policy there is two different regime: discretionary policy and rule of policy. According to the recent theories, in a discretionary regime instead of rule, any decision undertaken by the central bank will lead to inflation bias. However, this paper analyze the effect of the monetary policy conduct by Central Bank of Madagascar considered as "discretionary regime" on inflation since 1994 to 2015. This period is chosen because of the reform undergoes by the central bank of Madagascar and the beginning of its independence from government.A review of the pertinent theories are very important to understand this research. This study is based on monetary theories and the theoretical model formulated by Cukierman(2000) in reference of Kydland and Prescott(1977) work. The theory show that discretionary monetary policy produce higher than optimal inflation due to the problem of time inconsistency of monetary policy. The conduct of monetary policy in a discretionary regime generates excess inflation when the monetary authority targets a higher than the natural output rate.To see if that discretionary policy lead to high inflation level, its need to analyze the determinant of inflation bias according to the theory. Time series model with the variable money supply growth GM2, discount rate DR and total output growth GGDP are using to explain the inflation bias IB. Econometric tools using a linear regression model on EVIEW7 software has been done to get the result. The data are obtained from official website of the Central Bank of Madagascar and the World Bank to ensure the reliability of the results.The empirical analysis demonstrate the presence of an inflationary bias following the decisions taking by the central bank. Indeed, a surprise increase about 1% of the money supply, ceteris paribus, followed by 0.32% increase of inflation in the same period. Also the results show that discretionary monetary policy of the Central Bank of Madagascar do not contribute to economic growth, only 2.8% average GDP growth in 22 years. And does not lead to the low inflation rate with 14.75% average for the same periods. The central bank of Madagascar failed to manage between output growth and inflation instead of focusing only on inflation.