1. 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

2. 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

3. 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.

4. 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

5. 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.

6. 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).

7. - 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