TITLE:
Financial Frictions and Macroeconomic Volatility in the WAEMU: A DSGE Model Approach
AUTHORS:
Marius Achi
KEYWORDS:
Macroeconomic Volatility, Financial Frictions, DSGE, WAEMU
JOURNAL NAME:
Modern Economy,
Vol.17 No.9,
September
21,
2026
ABSTRACT: This paper studies the role of financial frictions in the propagation of macroeconomic fluctuations within the WAEMU, drawing on data covering the period 1980-2025, a reduced 26-variable representative DSGE model with a calibrated financial accelerator, and a partial Bayesian estimation of two of its ten free critical parameters. The credit market has tightened since 2020, with stricter borrower screening, while investment has overtaken inflation as the leading source of macroeconomic volatility since the 1990s. The calibrated financial accelerator substantially amplifies the transmission of capital-return shocks to entrepreneurial net worth, but it is foreign interest rate shocks, transmitted through a calibrated (not estimated) policy-rule coefficient linked to the CFA franc’s peg to the euro, within this reduced model, that dominate the Union’s macroeconomic variance, with financial shocks contributing only marginally. A Bayesian estimation of the most decisive parameters reveals an almost flat Phillips curve and an external finance premium elasticity markedly higher than its value calibrated on U.S. data. These results, obtained from a reduced approximation of the full 74-variable baseline model, call for strengthening credit information, adopting countercyclical macroprudential policy, and reflecting on the scope for monetary autonomy under the euro peg.