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Validity Assessments of International Parity in the ‘Ecozone’: Implications for Monetary Models of Exchange Rate Determination

Mogaji, Peter Kehinde (2019): Validity Assessments of International Parity in the ‘Ecozone’: Implications for Monetary Models of Exchange Rate Determination. Published in: International Journal of Entrepreneurship Management Innovation and Development , Vol. 3(1), (2019): pp. 97-131.

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In proposing monetary integration, the fifteen-member Economic Community of West African States (ECOWAS) resolved to evolve and adopt a single currency, ‘eco’ across the African sub-continent by January 2020.This proposed monetary region is consequently styled by this author as ‘proposed Ecozone’. This paper appraised the international parity conditions in the proposed monetary union with specific focus on purchasing power parity (PPP), international Fisher Effect (IFE) and uncovered interest parity (UIP). The examination of simultaneous validity of these postulations and theories in the cases of the 15-countries were performed through the investigation of directions of bilateral relationship of the countries of the Ecozone. Monthly, quarterly and annual data spanning averagely over a period of 28 years between 1990 and 2017 were employed in this study. Residual-based cointegration test methods of Engle-Granger, Philip-Ouliaris and Park’s Added Variable and the Johansen cointegration tests were applied in evaluating these parity conditions. Results generated by various empirical estimations generally revealed that the international parity theoretical propositions of absolute PPP, relative PPP, international Fisher Effects and the uncovered interest parity are hugely not valid across the proposed ‘Ecozone’. However, the cointegration of real exchange rate, based on the possible anchor country for the proposed monetary union, Nigeria, holds, thus implying positive implications for the proposed monetary integration of the West African sub-continent as there are evidences to conclude that there are long run association and co-movements of these real exchange rates which more importantly have bearings and relationships with the lead economy in the region. One crucial implications of the failure of the validity of PPP to hold across the proposed Ecozone is that monetary models of exchange rate determination will be inappropriate for the proposed monetary union because purchasing power parity is a crucial building block of these monetary models of exchange rate determination.

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