Abstract
This study analyzed the degree of business cycles’ synchronization of ECOWAS economies in order to ascertain whether the formation of a broader monetary union in 2020 will be beneficial to the entire region. Annual real GDP growth rate from 1975 to 2015 was de-trended using the Hodrick-Prescott filter (HP) filter to obtain two components- permanent and transitory components. Lastly, cross country correlations of the different components were used to analyze the business cycles of ECOWAS economies. Result from the transitory component shows that the business cycles of WAEMU sub-economies are similar. But on a general note, the correlation coefficients of both components show that the business cycles of ECOWAS economies differ significantly, suggesting that, a broader monetary union involving both WAEMU and WAMZ economies will not be beneficial to the entire ECOWAS region. However, ECOWAS governments can take the risk of forming a monetary union in 2020 since a high probability of addressing a wide range of macroeconomic differentials across the region is incumbent on ex-post conditions, rather than on ex-ante prerequisite conditions that only focuses on the cost of relinquishing monetary autonomy.
Highlights
The discourse on the desirability of establishing a monetary union has often been situated within the framework of the Traditional Optimum Currency Area (TOCA) theory
This study explores the the Hodrick-Prescott filter (HP) by de-trending the time series variable of the growth rate of real Gross Domestic Product (GDP) of Economic Community of West African States (ECOWAS) economies
Most pairs of economies are not correlated implying that a broader monetary union involving both West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ) economies will not be beneficial to the entire ECOWAS region
Summary
The discourse on the desirability of establishing a monetary union has often been situated within the framework of the Traditional Optimum Currency Area (TOCA) theory. Nigeria is the largest Country and the greatest oil exporter in the region, while prospective union members’ international trade is heavily skewed towards commodity exports, making the terms of trade shocks highly uncorrelated across the region [17] This implies that the divergence of shocks among ECOWAS economies makes the envisaged West African monetary union costly and will eventually undermine any common stabilization policy in the region. Few studies have situated the feasibility of the West African monetary union within the framework of the TOCA theory by analyzing the degree of symmetry of shocks across ECOWAS economies Their findings indicate that the formation of a broader monetary union will be costly [20,21,22,23].
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