The proposed eco: should West Africa proceed with a common currency?

Chuku, Chuku (2012): The proposed eco: should West Africa proceed with a common currency?

Abstract

This paper investigates the rationality of proceeding with a common currency in West Africa by testing for symmetry and speed of adjustment to four underlying structural shocks among a pair of 66 ECOWAS economies. The findings reveal that there is relatively high degree of symmetry in the responses of the economies to external disturbances, while about 85 percent of the correlations in supply, demand and monetary shocks among the countries are asymmetric. The size of the shocks and speed of adjustment among countries are also dissimilar, suggesting that ECOWAS should not yet proceed with the eco, since the costs will outweigh the benefits.

• Item Type: MPRA Paper
• Language: English
• Keywords: Monetary union, Structural VAR, Optimal currency area, ECOWAS, West Africa
• Subjects: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F42 - International Policy Coordination and Transmission; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

References

Addison, E., Opoku-Afari, M., and Kinful, E., (2005). Terms of trade and real exchange rate shocks and implications for the West African Monetary Zone, Bank of Ghana Working Paper No. 12.

Aladidede, P., Coleman, S., and Cuestas, J. (2011). Inflationary shocks and common economic trends: implications for West African monetary union membership. Journal of Policy Modelling, (in press) doi:10.1016/j.jpolmod.2011.10001.

Amisano, G., and Giannini, C., (1997). Topics in Structural VAR Econometrics, second ed. Springer, New York.

Bayoumi, T. (1992). The Effects of the ERM on participating economies. IMF Staff Papers, Vol. 39, No. 2, pp. 330–356

Bayoumi, T., and Eichengreen, B. (1994). One Money or Many? Analyzing the Prospects for Monetary Unification in Various Parts of the World. Princeton Studies in International Finance #74.

Bayoumi, T., and Ostry, J. D. (1997). Macroeconomic shocks and trade flows within sub-Saharan Africa: Implications for optimum currency arrangements. Journal of African Economies, 6(3), 412–444.

Be´nassy-Que´re´, A., and Coupet, M. (2005). On the adequacy of monetary arrangements in sub-Saharan Africa. World Economy, 28(3), 349–373.

Blanchard, O., and Quan, D., (1989). The dynamic effects of aggregate demand and supply disturbances. American Economic Review. 79, 655–673.

Buigut, S. K., and Valev, N. T. (2005). Is the proposed East African Monetary Union an optimal currency area? A structural vector autoregression analysis. World Development, 33(12), 2119–2133.

De Grauwe, P., 2005. Economics of Monetary Union, 6th edition. Oxford University Press.

Debrun, X., Masson, P., and Pattillo, C. (2005). Monetary union in West Africa: Who might gain, who might lose, and why? Canadian Journal of Economics, 38(2), 454–481. Fielding, D., & Shields, K. (2001). Modeling macroeconomic shocks in the CFA Franc zone. Journal of Development Economics, 66, 199–223.

Frankel, J., and Rose, A., (1996). The Endogeneity of the Optimum Currency Area Criteria? NBER Working Paper 5770

Hoffmaister, A. W., Roldos, J., and Wickham, P. (1998). Macroeconomic fluctuations in sub-Saharan Africa. IMF Staff Papers, 45, 132–160.

Houssa, R. (2008). Monetary union in West Africa and asymmetric shocks: A dynamic structural factor model approach. Journal of Development Economics, 85, 319-347.

Huang, Y., and Guo, F. (2006). Is currency union a feasible option in East Asia: A multivariate structural VAR approach? Research in International Business and Finance 20, 77-94.

Huizinga, H., and Khamfula, Y. (2004). The Southern African Development Community: Suitable for a monetary union? Journal of Development Economics, 73(2), 699–714.

Karras, G. (2006) Is Africa and Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits, Journal of African Economies, 16, September 2006,

Kendall, M.G., and Stuart, A. (1973). The Advanced Theory of Statistics. Inference and Relationship, vol. 2, 3rd ed. Griffin, London.

Kose, A.M., and Reizman, R. (2001). Trade shocks and macroeconomic fluctuations in Africa. Journal of Development Economics. 65, 55–80.

Masson, P., and Pattillo, C. (2005). The monetary geography of Africa. Washington, DC: Brookings Institution Press.

McKinnon, R. I. (1963). Optimum currency area. American Economic Review, 53, 17–724.

Mundell, R. A. (1961). A theory of optimum currency areas. American Economic Review, 53, 657–664.

Ng, S., and Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica 69 (6), 1519–1554.

Ogunkola, E., 2005. An evaluation of the viability of a single monetary zone in ECOWAS. AERC Research Paper No. 147.

Saxena, S. (2005). Can South Asia adopt a common currency? Journal of Asian Economics, 16, 635-662.

Tsangarides, C., and Qureshi, M. (2008). Monetary union membership in West Africa: A cluster analysis. World Development, 36 (7), 1261-1279.

Yehoue, E., (2005). On the pattern of currency blocs in Africa. IMF Working Paper No. 05/95.