Abstract
This study utilises the generalised purchasing power parity (GPPP) to assess the feasibility of a monetary union in the East African Community (EAC) region. Time series and panel vector error correction models (VCM) were used to analyse monthly data from 1996-2016 for the five EAC countries. The cointegration results support the existence of a long-run relationship between the tested variables, providing evidence for the optimum currency area (OCA) and the feasibility of monetary union in the EAC region. The VECM results indicate some differences in the size of the coefficients, suggesting that any change/shock of real exchange rate in the region may cause unintended currency flow from one country to the other in the short run, and this may constrain the possibility of an effective and efficient monetary union. Therefore, member countries should harmonise their monetary policies well ahead of the implementation of the monetary union the region.Keywords: East African Community, Monetary Union, GPPP, Optimum Currency Area.JEL Classifications: E42, F15, F31, F36, F45DOI: https://doi.org/10.32479/ijefi.11846
Highlights
More than a decade ago, the Association of African Central Bank Governors, in 2003, announced that it would work for a single currency and common central bank for Africa by 2021 (Mboweni, 2003)
Prior to generalised purchasing power parity (GPPP) analysis using various econometrics techniques, correlation analysis was conducted for initial inspection of the bivariate relationships of real exchange rates in the East African Community (EAC) region
The Johansen cointegration test indicated that the EAC region constitutes an optimum currency area in as far as the GPPP is concerned
Summary
More than a decade ago, the Association of African Central Bank Governors, in 2003, announced that it would work for a single currency and common central bank for Africa by 2021 (Mboweni, 2003). Many regional trading blocs and economic communities are working towards this grand objective. (in 2018), 44 African countries signed an accord to stablish a Continental Free Trade Area (CFTA), which supports a commitment made previously to establish a monetary union for the continent by the year 2021. The East African Community (EAC), like many other regional trading blocs on the continent, is engaged in various forms of economic integration initiatives to support the continental grand objectives by firstly implementing a monetary union for its region. It often argued that the desire to create a monetary union and a single currency for the African continent is to respond to perceived political, economic and leadership weaknesses of the continent, and that it is inspired by Europe’s success story with regard to the euro (Masson and Pattillo, 2004). The OAU is a predecessor to the AU, which was established in 1963
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