An Assessment Of The Costs, Benefits And Optimality Of The Common Monetary Area In Southern Africa

Abstract

In this paper we aim to answer the following two questions: 1) has the Common Monetary Area in Southern Africa (CMA) been an optimal currency area (OCA)Π2) What are the costs and benefits of the CMA for its participating countriesΠTo answer these questions, we carry out a two-step econometric exercise based on the theory of generalised purchasing power parity (G-PPP). The first exercise tests whether the CMA (but also Botswana as a de facto member) forms an OCA by detecting the existence of common long-run trends in their bilateral real exchange rates. The second exercise identifies the determinants of deviations from G-PPP in the CMA as measured through the degree of pairwise price correlation. These determinants stand for the costs and benefits of joining a monetary union, namely the degree of trade openness, the degree of production diversification (and the interaction between these two), the synchronicity of business cycles and the kind of gross capital inflows received by the member countries.