Abstract
This paper, estimates the costs and benefits of a common currency in WAMZ. Behavioral models capturing the elements of costs (asymmetric shocks, loss of monetary policy autonomy, and fiscal policy distortion), and benefits (trade creation, financial integration effects and policy coordination gains) were estimated using the Vector Auto-regression (VAR) procedure and panel estimation technique.VAR impulse response and forecast error method was used to determine the countries’ response to shocks while panel regression technique was used to estimate other behavioral equations. Fiscal policy distortion and loss of monetary policy autonomy are the main cost of monetary union in the zone while the potential trade creation gain is marginal. High disposition to money reserve and weak revenue base are the core determinants of fiscal policy distortion in the zone. Overall, the paper concludes that fiscal policy distortion constitutes serious policy challenge to monetary union in the zone. Dealing with this challenge may require short-run systematic macroeconomic adjustments to enhance the convergence of macroeconomic policy indicators in the zone.
Highlights
Since the influential work of Mundel (1961) on Optimum Currency Area (OCA), the elimination of national currencies and their replacement by a common regional currency have continued to be a topical subject
Economic Community of the West African States (ECOWAS) is divided into two main blocks: the West Africa Economic and Monetary Union (WAEMU) zone that shares a common currency with the Central Africa Economic and Monetary Union (CAEMU): the CFA zone, and the non-WAEMU countries that uses’ their separate national currencies
We developed behavioral models to estimate the costs elements, and benefits elements
Summary
Since the influential work of Mundel (1961) on Optimum Currency Area (OCA), the elimination of national currencies and their replacement by a common regional currency have continued to be a topical subject. Mundel (1961) laid the theoretical foundation for the basic economic and political considerations why countries should adopt a common currency. The Economic Community of the West African States (ECOWAS) was established in 1975 with the primary objective of forging a strong economic and monetary integration in the sub-region. Through the establishment of a common market and adoption of a common currency, the ECOWAS integration arrangement was expected to accelerate economic growth and transformation of the sub-region with the overall aim of alleviating poverty among the people. ECOWAS is divided into two main blocks: the West Africa Economic and Monetary Union (WAEMU) zone that shares a common currency with the Central Africa Economic and Monetary Union (CAEMU): the CFA zone, and the non-WAEMU countries that uses’ their separate national currencies
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