Estimation of the East African Community's trade benefits from promoting intra‐regional trade

Abstract

AbstractIn the literature on economic integration, the optimum currency area (OCA) theory says that there should be a high degree of trade between potential members of a monetary union for them to benefit from the use of a single currency. This study uses an augmented gravity model of trade to estimate the East African Community's (EAC) trade effects, as this community decided to participate in a monetary union by 2024. The study uses the fixed effect filter (FEF) estimator, which follows a two‐step approach and outperforms the standard fixed effects (FE) estimator. The results indicate that EAC has the potential to increase trade among partner states by 122% more than expected from the normal trade levels. The study, therefore, supports the ongoing East African Monetary Union process. However, to improve the likelihood of creating a more sustainable monetary union, the study recommends these countries to primarily focus on the full implementation of the customs union and common market steps. The main contribution of this study is that it provides robust estimates of the EAC's effects on intra‐regional trade using more recent data and updated econometric techniques.