Abstract
This study was conducted to establish whether the key variables in monetary policy transmission mechanisms are converging within the East African Community. This region is eyeing having an economic union and subsequently a monetary union hence the significance of investing developments in the monetary sector. The analysis used panel data from the year 2005 to 2020 for five EACs. To test for convergence of interest rates and exchange rates, the analysis employed; unit-root test, sigma convergence, co-integration tests, and finally used the panel fixed effect model to establish the impact of the two variables on the GDP. The analysis shows that in the short run, there is no convergence in interest rates but there is convergence in exchange rates. However, in the long run, the two monetary policy variables are co-integrated indicating that the region is doing well in terms of integration in the financial sector in their preparation to form a common trade area and monetary union. The analysis of the impact of the two variables on economic growth shows that only the exchange rate is significant, therefore, the region should strive to foster a stable exchange rate regime to realize increased economic growth.
Highlights
The desire for integration has been in existence since the African countries realized independence and as a result, several regional groups have been formed
Since East African Community (EAC) have already committed to a monetary union which was to have been formulated in 2012, it is important to establish the convergence of monetary instruments and exchange rates which are critical to the formation of a monetary union and the policy implication that it will have to the respective nations
This is confirmation that the variations in the interest rates among the EACs are declining over time, meaning that they are converging to a common value
Summary
The desire for integration has been in existence since the African countries realized independence and as a result, several regional groups have been formed. The EAC must not be over-excited with the idea of forming a monetary union, to start with they have not been able to successfully establish a stable economic union ten years from the time the agreement was signed (inter-regional trade is only 15%) This is a very low starting point, the members heavily depend on exporting raw material which will make catching up with the developed countries be an uphill task. This will lead to direct benefits to the consumers in terms of reduced prices in the financial services and indirect benefits in terms of reduced borrowing rates It is, worthwhile to establish the gains that the EAC has so far made in terms of convergence in monetary and exchange rate policies, which would translate, to gains by the member countries from the deregulation of policies in the financial sector aimed at efficiency.
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
