Single Currency and Regional Integration in The ECOWAS Region: A New Estimation Technique Using the Pseudo Maximum Likelihood Poisson with High Dimensional Fixed Effects (PPMLHDFE)

Abstract

The progress of regional integration in ECOWAS is leading to the desire to create an optimal monetary zone. This desire to create an optimal monetary zone is leading to a wave of divergent views on the effect and exchange rate regime of the single currency on trade. On the one hand, WAMZ countries want to adopt it with a flexible exchange rate, while on the other hand, WAEMU countries want to adopt it with a fixed exchange rate pegged to the euro. This divergence of views is at the heart of our problem. We need to analyze the effect of this currency and its flexible exchange rate regime on regional integration, more particularly the market integration of the Economic Community of West African States. Our evaluation is based on an augmented gravity model as the basic theoretical model, with the Pseudo Maximum Poisson Likelihood with High Dimension Fixed Effects (PPMHDFE) as the estimation method. This panel study is based on data from the World Bank (WDI), IMF (DOTS) and CEPII from 2009 to 2018. The question addressed by the analysis of the potential effect of sharing a single currency on integration by the ECOWAS market, allows us to arrive at two main results. (i) The potential effect of the single currency on trade is significant, robustness tests confirm the positive effect of currency sharing on trade. (ii) The flexible exchange rate has positive effects on trade. Thus, we therefore call on the political leaders of ECOWAS countries to make efforts to meet the convergence criteria and the establishment of this single currency in order to be the foundation of the single African currency, on the one hand. On the other hand, we recommend the adoption of a single currency with a variable exchange rate with a gradual approach.