Feasibility of a Monetary Union in the East African Community: A Structural Vector Autoregression Model

Abstract

The aim of this paper is to assess the suitability of a monetary union among the East African Community (EAC) members. EAC consists of five neighbouring countries situated in the eastern part of Africa, which include Burundi, Kenya, Rwanda, Tanzania and Uganda. The methodological approach of this paper is based on AD-AS framework. The study focuses on the symmetry and asymmetry of shocks affecting EAC countries; a four-variable structural vector auto-regression model was used to identify four types of shocks: global supply shock, domestic supply shock, monetary supply shock, and domestic demand shocks. After identifying the shocks, we considered cross country correlation analysis, analysis of variance, and impulse response analysis. The results of correlation shock analysis revealed that domestic demand shocks and external supply shocks were dominant in the region, while domestic supply shocks and monetary shocks were less correlated and asymmetry in the region. In conclusion, the study results did not show strong support for the formation of a currency union in the region at present, but nevertheless gives some hope to a successful monetary union in the future.