Integration of macroeconomic fundamentals in the West African Monetary Zone: A multi scale perspective

Abstract

A recently developed wavelet multiple correlations and cross correlations based on the maximal overlap discrete wavelet transform by Fernández-Macho is employed to analyse the interdependence of macroeconomic fundamentals among countries within the West African Monetary Zone for data from January 2000 to December 2018. We establish that the nature of interdependence among exchange rates, inflation, and interest rates vary across the countries. We document that the overall correlations of the three macroeconomic variables are weak in the short term, medium term, and long term. There is evidence of weaker integration at all frequencies for exchange rates, inflation, and interest rates.However, Ghana has the maximum wavelet multiple correlations at these times. The overall correlation of macroeconomic variables shows inconsistencies and may be accounted for by varying factors which often exert influence on market linkages over time. It is clear from the empirical evidence that the ex-ante conditionality for the introduction of the single currency in West African Monetary Zone will be difficult to achieve.