Simplice A, Asongu (2012): Are Proposed African Monetary Unions Optimal Currency Areas? Real, Monetary and Fiscal Policy Convergence Analysis. Forthcoming in:
Download (202kB) | Preview
Purpose – A spectre is hunting embryonic African monetary zones: the EMU crisis. This paper assesses real, monetary and fiscal policy convergence within the proposed WAM and EAM zones. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of central bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states.
Design/methodology/approach – In the analysis: monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size; real sector policy targets economic performance in terms of GDP growth at macro and micro levels; while, fiscal policy targets debt-to-GDP and deficit-to-GDP ratios. A dynamic panel GMM estimation with data from different non-overlapping intervals is employed. The implied rate of convergence and the time required to achieve full (100%) convergence are then computed from the estimations.
Findings – Findings suggest overwhelming lack of convergence: (1) initial conditions for financial development are different across countries; (2) fundamental characteristics as common monetary policy initiatives and IMF backed financial reform programs are implemented differently across countries; (3) there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; (4) institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones; (5) absence of fiscal policy convergence and no potential for eliminating idiosyncratic fiscal shocks due to business cycle incoherence.
Practical implications – As a policy implication, heterogeneous structural and institutional characteristics across countries are giving rise to different levels and patterns of financial intermediary development. Thus, member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of convergence in monetary, real and fiscal policies. This could be done by stringently monitoring the implementation of existing common initiatives and/or the adoption of new reforms programs.
Originality/value – It is one of the few attempts to investigate the issue of convergence within the proposed WAM and EAM unions.
|Item Type:||MPRA Paper|
|Original Title:||Are Proposed African Monetary Unions Optimal Currency Areas? Real, Monetary and Fiscal Policy Convergence Analysis|
|Keywords:||Currency Area; Convergence; Policy Coordination; Africa|
|Subjects:||F - International Economics > F1 - Trade > F15 - Economic Integration
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission
O - Economic Development, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa
F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration
P - Economic Systems > P5 - Comparative Economic Systems > P52 - Comparative Studies of Particular Economies
|Depositing User:||Simplice Anutechia Asongu|
|Date Deposited:||26. Sep 2012 08:53|
|Last Modified:||19. Feb 2013 19:12|
Afonso, A., & Rault, C., (2007). “What do we really know about fiscal sustainability in the EU? A Panel Data Diagnostic” William Davidson Institute. Working Paper No. 893.
African Manager (2012, January). “ECOWAS single currency for launch 2020”, http://www.africanmanager.com/site_eng/detail_article.php?art_id=13398 (accessed on the 15th of January 2012).
African Online News (2012, January). “East Africa Monetary Union Challenging”, AON http://www.afrol.com/articles/35643 (accessed on the 15th January 2012).
Alagidede, P., (2008). “African Stock Market Integration: Implications for Portfolio Diversification and International Risk Sharing”, Proceedings of the African Economic Conferences 2008.
Alagidede, P., Coleman, S., & Cuestas, J. C., (2011). “ Inflationary shocks and common economic trends: Implications for West African Monetary Union membership”, Journal of Policy Modeling, Forthcoming.
Allen, F., & Gale, D.,(2000). Comparing Financial Systems. The MIT Press, Cambridge, MA.
Angeloni, I., & Dedola, L.,(1999). “From the ERM to the Euro: New evidence on economic and policy among EU countries”, European Central Bank Working Paper, No. 4.
Arellano, M., & Bond, S., (1991). “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations”, The Review of Economic Studies, 58, pp. 277-297.
Asongu, S. A., (2011a). “Law, finance, economic growth and welfare: why does legal origin matter?”, MPRA No. 33868.
Asongu, S. A., (2011b). “Law and finance in Africa”, MPRA No. 34080.
Asongu, S. A., (2011c). “Finance and democracy in Africa”, MPRA No. 35500.
Asongu, S. A., (2011d). “Why do French civil-law countries have higher levels of financial efficiency”, MPRA No. 33950.
Asongu, S. A., (2011e). “New financial intermediary development indicators for developing countries”, MPRA No. 30921.
Asongu, S. A., (2012). “African stock market performance dynamics: a multidimensional convergence assessment”, Journal of African Business: Forthcoming.
Barro, R. J., (1991). “Economic growth in a cross section of countries”, Quarterly Journal of Economics, 106, pp. 407-443.
Beine, M., Cosma, A., & Vermeulen, R., (2010). “The dark side of global integration: increasing tail dependence“, Journal of Banking and Finance, 34, pp. 184-192.
Bessler, D. A., & Yang, J., (2003). “The structure of interdependence in international stock markets”, Journal of International Money and Finance, 22, pp. 261-287.
Bondt, G., (2000). “Financial Structure and Monetary Transmission in Europe” . Cheltenham: Edward Elgar.
Brada, J. C., Kutan, A. M., & Zhou, S., (2005). “Real and monetary convergence between the European Union’s core and recent member countries: A rolling cointegration approach”, Journal of Banking and Finance, 29, pp. 249-270.
Bruno, G., De Bonis, R., & Silvestrini, A., (2011). “Do financial systems converge? New evidence from financial assets in OECD countries”, Journal of Comparative Economics; Forthcoming.
Buigut, S.K., & Valev, N.T.,(2005). “Is the Proposed East African Monetary Union an Optimal Currency Area? A Structural Vector Autoregression Analysis”, World Development, 33(12), pp. 260-267.
Casu, B., & Girardone, C., (2010). “Integration and efficiency convergence in the EU banking”, Omega, 38, pp. 260-267.
Celasun, O., & Justiniano, A., (2005). “Synchronization of output fluctuations in West Africa: Implications for monetary unification”, IMF Working Paper.
Chen, G-M., Firth, M., & Rui, O. M., (2002).“Stock market linkages: evidence from Latin America”, Journal of Banking and Finance, 26, pp. 1113-1141.
Darvas, Z., Rose, A. K., & Szapary, G., (2005). “Fiscal divergence and business cycles synchronization: Irresponsibility is idiosyncratic”, NBER Working Paper No. 11580
Debrun, X., Masson, P., & Pattillo, C., (2005). “Monetary union in West Africa: Who might gain, who might lose and why?”, Canadian Journal of Economics, 38(2), pp. 454-481.
Faini, R., (2006). “Fiscal policy and interest rates in Europe”, Economic Policy, 21(47), pp. 443–489.
Fung, M.K., (2009). “Financial development and economic growth: convergence or divergence?”, Journal of International Money and Finance, 28, pp. 56-67.
Grubel, H., (1968). “Internationally diversified portfolio: welfare gains in capital flows”, American Economic Review, 58, pp. 89-94.
Islam, N.,(1995). “Growth Empirics: A Panel Data Approach”, The Quarterly Journal of Economics, 110, (4), pp. 1127-1170.
Kim, S. J., Moshirian, F., & Wu, E., (2005). “Evolution of international stock and bond market integration: influence of the European Monetary Union”, Journal of Banking and Finance, 30, pp. 1507-1534.
Kocenda, E., Kutan, A. M., & Yigit, T. M., (2008). “Fiscal convergence in the European Union”, North American Journal of Economics and Finance, 19, pp. 319-330.
Levine, R., (2004). “Finance and Growth: Theory and Evidence”. NBER Working Paper 10766.
Levy, H., & Sarnat, M., (1970). “International diversification of investment portfolios”, American Economic Review, 60, pp. 668-675.
Mkenda, B. K., (2001). “Is EA an optimum currency area?”, Working Papers in Economics, No. 41. School of Economics and Commercial Law, Goteborg University.
Narayan, P. K., Mishra, S., & Narayan, S., (2011). “Do market capitalization and stocks traded converge? New global evidence”, Journal of Banking and Finance, 35, pp. 2771-2781.
Onorante, L. (2004). “Fiscal convergence before entering EMU”. In Liebscher, Liebscher, et al. (Eds.), The economic potential of a larger Europe (pp. 245–259). Cheltenham, UK /Northampton, MA: Elgar.
Prichett, L., (1997). “Divergence, big time”, Journal of Economic Perspectives, 11, pp. 3-17.
Scholtens, B., & Naaborg, I.,(2005). “Convergence of Financial Intermediary Activities within Europe: A comparison of banks’ balance sheets in the EU and the New E.U Member States”, Department of Finance, University of Groningen.
Tsangarides, C.G., & Qureshi, M.S.,(2008). “Monetary Union Membership in West Africa: A Cluster Analysis”, World Development, 36(7), pp. 1261-1279.
Umutlu, M., Akdeniz, L., & Altag-Salih, A., (2010). “The degree of financial liberalisation and aggregated stock-return volatility in emerging markets”, Journal of Banking and Finance, 34(3), pp. 509-521.
Von Furstenberg, G. M., & Jeon, B. N., (1989). “International stock price movements: links and messages”, Brookings Papers on Economic Activity, 1, pp. 125-179.
Weill, L.,(2009). “Convergence in banking efficiency across European countries”, International Financial Markets, Institutions and Money, 19, pp. 818-833.
Willett, T. D., (2011). “Some Lessons for Economists from the Financial Crisis”. In Indian Growth and Development Review, 3(2), pp. 186-208.
Willett, T. D., & Srisorn, N., (2011, June). “Some Lessons for Asia from the Euro Crisis”, The Claremont Colleges, Workshop on Global Growth and Economic Governance Implications for Asia: George Mason University.
Yu, I-W., Fung, K-P., & Tam, C-S., (2010). “Assessing the financial market integration in Asia-equity markets”, Journal of Banking and Finance, 34, pp. 2874-2885.