African Monetary Union Research Articles

Monetary Integration Across West Africa: Is the Region Ripe for a Monetary Union?

This study investigates the possibility of forming a monetary union across West Africa. This was achieved by employing the structural VAR framework. Data on real GDP, inflation, and exchange rate were used to represent supply, monetary, and demand shocks from the period 1986 to 2020. The impulse response and variance decomposition results showed that shocks affecting the West African region are idiosyncratic, while the residuals of the structural VAR were used to compute the correlation coefficient. The correlation coefficient revealed that the demand and monetary shocks were symmetric across WAEMU countries and asymmetric for the rest of the region. The study suggests that the West African region is not ripe for a monetary union. However, the study opined that the WAEMU countries are the closest to forming a West African monetary union and a piecemeal approach may be adopted such that the WAEMU countries are the first to form the union, while the rest may join when they meet the convergence criteria. In essence, West African countries’ central banks need to focus on harmonizing their monetary policies and remove all barriers to factor mobility for the synchronization of shocks and for all countries to meet the convergence criteria.

Correlations of structural shocks, dynamic responses of output and inflation to commodities price shocks and monetary union in WAMZ

PurposeThis paper examines correlations of the underlying structural shocks and the degree of synchronization in the impulse responses of output, inflation and trade to a one standard deviation shock to non-oil commodities price index and exchange rates within the West African Monetary Zone (WAMZ) countries from 1990q1 to 2020q1.Design/methodology/approachThis paper uses the structural vector autoregressive model to isolate the underlying structural shocks and compares them with the West African Monetary Union (WAEMU) countries.FindingsFindings from the study suggest that correlations of underlying structural shocks are more profound in the WAEMU than in the WAMZ. Impulse responses of output to price and exchange rate shocks are more symmetric in the WAEMU than in the WAMZ. However, impulse responses of inflation to price and exchange rate shocks are symmetric in the WAMZ than in the WAEMU and responses of trade in both sub-groups are not uniform.Practical implicationsThe paper concludes that the WAMZ does not constitute an Optimum Currency Area concerning the correlations of the structural shocks and output. However, it has achieved convergence in inflation and there are adequate adjustment mechanisms to shocks in the WAMZ than in the WAEMU. Therefore, the WAMZ may not suffer from joining the monetary union. Thus, economic Community of West African States may take steps to roll out the monetary union.Originality/valueThe paper examines correlations of the underlying structural shocks, impulse responses of output and inflation to shocks to commodities price and exchange rates in the WAMZ and compares them with the WAEMU.

Business cycle synchronization and African monetary union: A wavelet analysis

In this paper, we analyze the feasibility of an African monetary union based on the necessary condition of business cycle synchronization. In this regard, we examine the synchronization of growth cycles between five Regional Economic Communities (RECs) that will have to merge to form an African monetary union: the East African Community; the Economic Community of Central African States; the Economic Community of West African States; the Southern African Development Community; and the Arab Maghreb Union. To do this, we use a new continuous wavelet approach. Results show evidence of heterogeneous synchronization across time and horizons between the RECs. Controlling for the influence of some countries' membership in several RECs at the same time, the synchronization landscape does not improve. Overall, our results suggest that business cycle synchronization across the RECs has not yet reached a sufficient level to allow African countries to benefit from a common monetary policy.

On the economic desirability of the West African monetary union: Would one currency fit all?

This paper investigates whether the West African nations will benefit from forming the ECO currency union. Using data from 15 countries over the 1999–2018 period, we assess heterogeneity between economies in terms of equilibrium exchange rates —i.e., the level of exchange rates consistent with the absence of macroeconomic disequilibria. Then, we address the sustainable exchange rate regime issue by evaluating whether the ECO should be pegged, freely floating, or something in between. We identify two homogenous groups of economies and find that neither a single currency peg nor a freely floating exchange rate regime would be preferable for any country or group of economies. Overall, our findings argue in favor of two ECOs, one for each of the two identified zones. Each ECO would serve as a virtual anchor for the considered group and would be determined by a basket of currencies mainly composed of euro and US dollar.

Economic Community of West African State’s (ECOWAS) Controversy: Wither a Need for Single Currency by 2021?

The business cycles in the West African Monetary Zone (WAMZ) as well as West African Economic and Monetary Union (WAEMU) using real GDP growth within 1980-2019, detrended by Hodrick–Prescott filters were analyzed. The Pearson correlation analysis on the computed z-scores was employed to examine the level of synchronization of business cycles, the level of symmetry in macroeconomic policies and the level of symmetry in trade flows. It was evident that business cycles synchronization was on the whole increasing, but with higher intensity within WAEMU region than within WAMZ region where only Ghana-Guinea, Ghana-Nigeria, Guinea-Gambia as well as Guinea-Nigeria as pairs were significantly synchronized. Symmetry in macroeconomic policies was on the whole minimal within ECOWAS region. The flow of trade however within ECOWAS region was asymmetric between Cote d’Ivoire and other WAEMU countries and between Nigeria and other WAMZ countries, but was symmetric between other ECOWAS countries, indicating that these economies rely more on transaction with other developed economies. The empirical results provided a direction for countries with synchronized business cycles such as Ghana, Guinea, Gambia and Nigeria to consider proceeding in the creation of the second West African monetary union (SWAMU) while also creating an enabling environment for other countries within WAMZ to join in due course. The study recommended among others that any country under WAEMU without strong similarities with other countries as pairs should disengage from WAEMU. On the converse, countries with strong similarities as pairs should unilaterally realign their exchange rate.

Estimation of the East African Community's trade benefits from promoting intra‐regional trade

AbstractIn the literature on economic integration, the optimum currency area (OCA) theory says that there should be a high degree of trade between potential members of a monetary union for them to benefit from the use of a single currency. This study uses an augmented gravity model of trade to estimate the East African Community's (EAC) trade effects, as this community decided to participate in a monetary union by 2024. The study uses the fixed effect filter (FEF) estimator, which follows a two‐step approach and outperforms the standard fixed effects (FE) estimator. The results indicate that EAC has the potential to increase trade among partner states by 122% more than expected from the normal trade levels. The study, therefore, supports the ongoing East African Monetary Union process. However, to improve the likelihood of creating a more sustainable monetary union, the study recommends these countries to primarily focus on the full implementation of the customs union and common market steps. The main contribution of this study is that it provides robust estimates of the EAC's effects on intra‐regional trade using more recent data and updated econometric techniques.

External Economic Shocks and Vulnerability of the West African Economic and Monetary Union

Background: The regional integration, may it be economic integration or monetary union, is considered, since the success of the European Union, as a mean to development and to mitigate the consequences of exposure to globalization. However, in the African context, the capacity of resilience and the vulnerability of these economies against external shocks remain questionable. Objective: This paper aims to analyze the effects of external economic shocks on the economies of West African Economic and Monetary Union (WAEMU) which is comprised of West African francophone countries (Benin, Cote d’Ivoire, Mali, Niger, Senegal and Togo) and lusophone countries (Bissau Guinea). Method: To achieve this, the Vector Auto Regression technique has been used. We examine the impact of Organization for Economic Cooperation and Development (OECD)’s GDP the price of agricultural commodities, the price of the crude oil barrel, and aid and development assistance shocks on the economies of the union. Due to the lack of data, Bissau Guinea has been removal from the analysis. The data ar primarily sourced from the World Development Indicators and World Economic Outlook databases respectively from the World Bank and the International Monetary Fund and cover the period 1980 – 2018. Results: The results show that the WAEMU countries are highly sensitive to the variations of these different variables with the exception of the price of the crude oil barrel. In addition, the impulse responses show that the WAEMU’s economies are permanently affected by these shocks. Conclusion: In terms of economic policy implications, it is essential to strengthen the insurance mechanisms such as intra-trade through the deepening of the regional integration process, responsible budgetary policy, flexibility of the economies, and the economic convergence for the viability of the union.

CONVERGENCE CRITERIA FOR AFRICAN MONETARY UNIONS: BRINGING IN NON-ECONOMIC FACTORS AND COMPARING THE TURKISH CASE

ABSTRACT The paper starts by noting that Turkey in her efforts to join the European Union and the European Monetary Union faces barriers that are non-economic in nature. Turkey is seen to be lagging behind the EU fraternity in providing complete democracy to its people. We find the strictures laid on to be rather unique, as such non-economic factors do not enter in, for instance, in discussions pertaining to regional monetary unions in Africa where a leader in economic performance may be a laggard in meeting non-economic convergence criteria. This paper develops non-economic convergence criteria, using five indices capturing the prevalence of democracy and freedom for the citizens, for regional African monetary unions in Africa, in West Africa and the CFA Franc Zone, and compare the convergence achieved by these nations with that of Turkey relative to the dominant economic player in Europe. It is noted that while Turkey lags behind in achieving convergence to the EU certain noneconomic factors, she does better in some others. Also, some African members of regional monetary unions are seen to fare worse that Turkey in converging to the specified non-economic criteria values. Keywords EURO, CFA Franc, Convergence Criteria, Optimum Currency, Democracy Index.

The stability of demand for money in the proposed Southern African Monetary Union

PurposeThe purpose of this paper is to investigate the stability of demand for money in the proposed Southern African Monetary Union (SAMU).Design/methodology/approachThe study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community. A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling.FindingsThe findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU.Originality/valueThis study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.

PAST AND CURRENT EUROPEAN MONETARY UNION CRISES: LESSONS FOR THE ENVISAGED WEST AFRICAN MONETARY UNION

The Economic Community of West African States (ECOWAS) is committed to forming a broader monetary union by 2020. The approach of forming the union is a replica of the European-type monetary union, which is predicated on the optimum currency area (OAC) theory. All the monetary unions that were created among European sovereign States within the last half of the eighteenth century, collapsed due to political and economic differences. Currently, the European monetary union (EMU) is unstable due to ongoing crises, which may not be a good signal for West African States, whose economies are persistently being hit by asymmetric shocks. This study therefore, analysed the economies of West African States within the context of the OAC theory, and further examined whether the past and current EMUs provide any lessons for ECOWAS. The analyses show that ECOWAS economies have not met the OAC theory, implying that the European-type monetary union crises might manifest in the ECOWAS region. To avert such crises in the envisaged West African monetary union, member countries must be compelled to satisfy the OAC criteria before ascending onto the union, and the governments of ECOWAS should lay more emphasizes on the political will and fiscal discipline of the respective member countries.Keywords: European Monetary Unions, Optimum Currency Area, Economic Community of West African StatesJEL Classifications: F15, F2, F33, F45DOI: https://doi.org/10.32479/ijefi.8231

The Stability of Demand for Money in the Proposed Southern African Monetary Union

This study investigates the stability of demand for money in the proposed Southern African Monetary Union (SAMU). The study uses annual data for the period 1981 to 2015 from ten countries making-up the Southern African Development Community (SADC). A standard function of demand for money is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across countries in the stability of money. This divergence is articulated in terms of differences in cointegration, CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long-term determinants and error correction in event of a shock. Policy implications are discussed in the light of the convergence needed for the feasibility of the proposed SAMU. This study extends the debate in scholarly and policy circles on the feasibility of proposed African monetary unions.

ANALYSIS OF THE IMPACT OF PUBLIC INVESTMENTS ON AGRICULTURAL GROWTH IN THE WEST AFRICAN ECONOMIC AND MONETARY UNION (WAEMU)

This article aims to analyse the determinants of agricultural growth in the West African Economic and Monetary Union (WAEMU). Fixed effect panel models have been estimated. The sample used to assess these determinants covers eight African countries over the period 1961 to 2017. The estimation results indicate that agricultural public investments have a positive and significant impact on agricultural growth and this impact depends on the combination with other factors of agricultural growth. In addition, the findings shows that other factors such as producer cotton prices, rainfall, number of tractors and farm labour force also drive good agricultural growth. On the other hand, the quantities of urea, the production and cotton land use do not have a significant incidence on the agricultural growth of the zone. For an effective agricultural growth in this area, the adoption of chemical, mechanical and consequential agricultural investments is becoming imperative and a necessary and sufficient condition to boost a true green revolution. Moreover, our results suggest that the main channel for sustainable agricultural growth in the union is the combination of all factors of production.

The long run stability of money demand in the proposed West African monetary union

This study examines the stability of money demand in the proposed West African Monetary Union (WAMU). The study uses annual data for the period 1981 to 2015 from thirteen of the fifteen countries making-up the Economic Community of West African States (ECOWAS). A standard money demand function is designed and estimated using a bounds testing approach to co-integration and error-correction modeling. The findings show divergence across ECOWAS member states in the stability of money demand. This divergence is informed by differences in cointegration, stability, short run and long term determinants, and error correction in event of a shock.

English

So far, the formation of a monetary union in the East African Community (EAC) has remained elusive. The EAC partner states therefore established set targets for macroeconomic convergence, with an aim to eliminate exchange rate variability within the bloc. Where countries are able to eliminate or reduce exchange rate adjustments to maintain external balance, the costs of a monetary union reduces, thus the more suitable it is for such a region to form a monetary union. Major macroeconomic variables need to be harmonized before establishing a monetary union such as real GDP, budget deficit/GDP, national savings, and inflation rate. However, empirical studies undertaken indicate that the rate of convergence of the member states economies to the set targets has been very slow, resulting into high exchange rate variability within the region. It is against this background that this study was carried out to determine the effect of convergence in real GDP growth rate on exchange rate volatility, of five EAC countries: Kenya, Uganda, Tanzania, Burundi, and Rwanda. The bloc was chosen for the study since it has scheduled to establish its common currency earlier than other African economic blocs, and thus its success will be a lesson to them. A panel data analysis was used over the period of 2000 to 2016. Sigma (standard deviation) was used in the study to establish convergence of variables. Levin et al. 2002) test for panel unit root was employed to test for data stationarity and it was found that real exchange rate and real GDP growth rate were stationary. Pedroni residual-based cointegration test was carried out to test for the long-run relationship between variables in the model and it was established that there exist a long-run relationship between exchange rate and explanatory variable. The study results showed that the entire explanatory variable had a significant and a negative effect on exchange rate volatility. This means that convergence in real GDP growth rate among the EAC countries reduces exchange rate variability within the region. Thus, the policy makers should ensure that the EAC countries harmonize their economies, which will help greatly to eliminate exchange rate adjustments within the region, in readiness for a stable and sustainable monetary union. Key words: Convergence, exchange rate volatility, GDP, East African monetary union.

Income Convergence in the East African Community

The East African Community partner states aim to establish a Monetary Union by 2023. As advanced by the optimum currency area theory, countries seeking to enter into a monetary union should be as similar as possible to reduce their susceptibility to adverse economic shocks. The East African Monetary Union Protocol signed in 2013 stresses the need for convergence of macroeconomic variables as important preconditions before forming the monetary union. The benchmark macroeconomic indicators include a headline inflation rate of eight per cent, a fiscal deficit of three per cent of the country’s gross domestic product on net present value terms, a debt to gross domestic product ratio of 50 per cent and maintenance of a 4.5 months’ reserves of import cover. Article 82 (1) of the East African Community Treaty also compels partner states to work towards harmonizing their macro-economic policies especially those related to interest and exchange rates, fiscal and monetary policies. However, as argued by many scholars, nominal convergence alone cannot indicate how well countries will perform once they are in a monetary union. The criteria also fail to distinguish the countries that constitute an optimal currency area. An autoregressive distributed model was applied in regression analysis. Empirical findings supported the presence of conditional convergence and that per capita gross domestic product growth was positively influenced by physical capital and nominal exchange rate depreciation and negatively affected by human capital and inflation rate. From the foregoing, it can be concluded that reduction of income differences among the partner states can be fostered through increased investments in physical capital, maintenance of a competitive exchange rate regime and a low inflation rate regime. Keywords: Unconditional convergence, conditional convergence, Solow model, optimum currency areas and autoregressive redistributed lag model

A Summary of a Survey on Proposed African Monetary Unions

This review summarises a survey of about 70 empirical studies on proposed African monetary unions published during the past fifteen years. Four main strands are outlined in four tables. They include the: (i) West African Monetary Zone (WAMZ), (ii) East African Monetary Union (EAMU), (iii) Southern African Monetary Union (SAMU) and (iv) African Monetary Union (AMU). A number of concerns are apparent from the feasibility and/or desirability of potential monetary unions. They are variations in: empirical strategies, selection of variables, considered periodicities and sampled countries. The Hegelian dialectics are used to establish selective expansion as the predominant mode of monetary integration. Some studies make the case for strong institutions and pegs as alternatives to currency unions. The employment of cluster analysis, distinguishing shocks from responses in the examination of business cycle synchronisation and the disaggregation of panels into sub-samples provide more subtle policy implications.

A LITERATURE SURVEY ON PROPOSED AFRICAN MONETARY UNIONS

AbstractThis study provides a survey of recent advances in the literature on proposed African monetary unions. The survey comprises about 70 empirical papers published during the past 15 years. Four main strands are discussed individually and collectively. They comprise the proposed: (i) West African Monetary Zone (WAMZ), (ii) East African Monetary Union (EAMU), (iii) Southern African Monetary Union (SAMU) and (iv) African Monetary Union (AMU). We observe a number of issues with establishing the feasibility and/or desirability of potential monetary unions, inter alia, they are variations in: choice of variables, empirical strategies, sampled countries and considered periodicities. We address this ambiguity by reviewing studies with scenarios that are consistent with Hegelian dialectics and establish selective expansion as the predominant mode of monetary integration. Some proponents make cases for strong pegs and institutions as viable alternatives to currency unions. Using cluster analysis, disaggregating panels into sub‐samples and distinguishing shocks from responses in the examination of business cycle synchronisation provide more subtle policy implications. We caution that for inquiries using the same theoretical underpinnings, variables and methods just by modifying the scope/context and periodicity may only contribute to increasing the number of conflicting findings. Authors should place more emphasis on new perspectives and approaches based on caveats of, and lessons from the European Monetary Union (EMU) and CFA zones.

The East African Monetary Union: Is the Level of Business Cycle Synchronization Sufficient?

The East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a goal of a currency union, as part of a movement toward eventual political union. A key factor in making a currency union desirable is a high level of business cycle synchronization (BCS) among member countries. In this paper we undertake a new approach to this topic with a recently developed set of tools. These tools have the advantage of yielding time-varying estimates, and, unlike previous metrics, allow us to gauge both differences of the phase of the business cycle between countries and differences in business cycle amplitude. We find BCS among the five countries does compare reasonable well with that found for euro zone nations before euro adoption. However, given the euros’ difficulties, this is not strong evidence in favor of the desirability of a currency union. Moreover, Rwanda appears less well-suited, in terms of BCS, than the other four countries. In addition, all five nations have experienced sharp drops in BCS in recent years. Lastly, there has been no significant increase in BCS since the 2000 EAC Treaty, or the 2005 customs union. Overall, our results cast doubt on the desirability of an East African currency union.

The East African Monetary Union: Is the Level of Business Cycle Synchronization Sufficient?

The East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a goal of a currency union, as part of a movement toward eventual political union. A key factor in making a currency union desirable is a high level of business cycle synchronization (BCS) among member countries. In this paper we undertake a new approach to this topic with a recently developed set of tools. These tools have the advantage of yielding time-varying estimates, and, unlike previous metrics, allow us to gauge both differences of the phase of the business cycle between countries and differences in business cycle amplitude. We find BCS among the five countries does compare reasonable well with that found for euro zone nations before euro adoption. However, given the euros’ difficulties, this is not strong evidence in favor of the desirability of a currency union. Moreover, Rwanda appears less well-suited, in terms of BCS, than the other four countries. In addition, all five nations have experienced sharp drops in BCS in recent years. Lastly, there has been no significant increase in BCS since the 2000 EAC Treaty, or the 2005 customs union. Overall, our results cast doubt on the desirability of an East African currency union.

A Literature Survey on Proposed African Monetary Unions

This study provides a survey of recent advances in the literature on proposed African monetary unions. The survey comprises about 60 empirical papers published during the past fifteen years. Four main strands are discussed individually and collectively, notably, the proposed: West African Monetary Zone (WAMZ), East African Monetary Union (EAMU), Southern African Monetary Union (SAMU) and African Monetary Union (AMU). We observe a number of issues with establishing the feasibility and/or desirability of potential monetary unions, inter alia, variations in: choice of variables, empirical strategies, sampled countries and considered periodicities. We address this ambiguity by reviewing studies with scenarios that are consistent with Hegelian dialectics and establish selective expansion as the predominant mode of monetary integration. Some proponents make cases for strong pegs and institutions as viable alternatives to currency unions. Using cluster analysis, disaggregating panels into sub-samples and distinguishing shocks from responses in the examination of business cycle synchronisation provide more subtle policy implications. We caution that for inquiries using the same theoretical underpinnings, variables and methods just by modifying the scope/context and periodicity may only contribute to increasing the number of conflicting findings. Authors should place more emphasis on new perspectives and approaches based on caveats of, and lessons from the European Monetary Union (EMU) and CFA zones.