Business Cycles, Bilateral Trade and Financial Integration: Evidence From Economic Community of West African States (ECOWAS)

Abstract

This paper identifies the determinants of synchronization of business cycles in ECOWAS because it allows decision-makers to better target their economic policies. It is relevant given the willingness of ECOWAS heads of state to create a single currency in 2020. Indeed, conducting actions in the direction of the synchronization of business cycles is important because the asymmetries of cycles observed within monetary union determine its sustainability. Unlike previous studies in this area, it is innovative as it takes into account financial linkages. In addition, it proposes new measures to increase the quality of results. Moreover, this paper takes into account the structure of trade by analyzing inter-regional links. Finally, in order to highlight the role of single currency in ECOWAS, it compares West African Economic and Monetary Union and the non-monetary zone within ECOWAS zone. We find that bilateral trade and financial integration are determinants of the synchronization of business cycles in the region. However, we find that regional financial integration channel dominates international financial integration channel. In addition, we find that the weakness of intracommunity trade doesn’t constitute a barrier to monetary union. Finally we find that single currency increases the synchronization of business cycles through bilateral trade.