Long-run relationship between interest rate spread and unemployment in the cemac region: a panel data analysis

Abstract

This paper examines the long-run relationship between interest rate spread and unemployment in the CEMAC region. The data used to carry out this study goes from 1960 to 2013 and are secondary data from the world development indicator database. We use the panel data analysis to carry out this study, our variables of interest turn out to be I (1) and after successfully performing the Johansen cointegration test, we applied the Error Correction Model (ECM) to estimate our parameters. We reached two major conclusions. First, there is cointegration between interest rate spread and unemployment in the CEMAC Region. Second, when considering countries individually, there is such a cointegration relationship for all member countries but Cameroon. Our results also portray that variations of the interest rate spread in the CEMAC region could account for 35 % of variations in total unemployment. An increase in the interest rate spread in the short and long run drives positively and significantly the level of total unemployment in the CEMAC region. Therefore, we proposed some policies measures such as reducing the interest rate spread to encourage investors to take more risks, create more jobs and drive down total unemployment. We also proposed to the government authorities of the CEMAC region to quit the CFA currency zone and join a flexible exchange rate system, so they could have more leverage to control monetary policies.