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Inflation Deviations Assessments of OCA Properties in the WAMZ

Mogaji, Peter Kehinde (2016): Inflation Deviations Assessments of OCA Properties in the WAMZ.

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Abstract

This paper traced the historical developments of monetary intrgration of West African and discussed the OCA theory and properties. Similarities in inflation is one of the properties of an optimum currency area (OCA). Literatures on inflation (as a property of an OCA) have been able to spell out the implications of inflation rates similarities among members or would-be members of a monetary union. This paper therefore aimed principally at the examination of the homogeneity in the patterns of inflation across the West African Monetary Zone (WAMZ) consisiting of Guines and the Anglophone West African countries (comprising of The Gambia, Ghana, Liberia, Nigeria and Sierra Leone); as well as investigating the degree of inflation deviations from some benchmarks. Annual data of consumer price index and GDP deflator inflation for the WAMZ countries, the United States (US) and the EMU employed here spans between 1980 and 2015. Data analyses were performed in six stages to assess inflation convergence, majorly by checking the feasibility of exchange fixation in the monetary zone through the measure of absolute inflation rate differentials generated by the deviations of the WAMZ's individual member's inflation rate from: (i) the US and the Eurozone's inflation rates, (ii) the convergence criterion policy inflation target rate of 5%, and (iii) the WAMZ's average inflation over a convergence 12-year period. These were further to some necessary correlation studies. These properties of integration of inflation rate differentials are very revealing for inflation rate convergence among WAMZ member countries. From the evaluations, there were evidences to suggest that The Gambia is the most country feasible for the exchange rate integration and fixation with the euro and the US dollars while Nigeria, the lead economy yielded unfavourable results in the inflation evaluation. Empirical findings also suggested that shocks to inflationary trends in the WAMZ would have permanent and long lasting effects on inflation rates in the zone as inflation may not return to the trend path overtime. This denote that the cost implications of following disinflationary policies in WAMZ countries may be high while it is very likely to be difficult forecasting or predicting future inflation movements which are based on past inflationary behaviours

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