The Long Run Stability of Money in the Proposed East African Monetary Union

Asongu, Simplice and Folarin, Oludele and Biekpe, Nicholas (2020): The Long Run Stability of Money in the Proposed East African Monetary Union. Published in: Journal of Economic Integration , Vol. 35, No. 3 (2 July 2020): pp. 457-478.

Abstract

This study investigates the stability of money in the proposed East African Monetary Union (EAMU). The study uses annual data for the period 1981 to 2015 from five countries making up the East African Community (EAC). 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 countries. This divergence is articulated in terms of differences in CUSUM (cumulative sum) and CUSUMSQ (CUSUM squared) tests, short run and long term determinants and error correction in event of a shock. Specifically, the results show that the demand for money is stable in the cases of Burundi, Rwanda and Tanzania based on the CUSUM and CUSUMSQ tests, while for the remaining countries (Kenya and Uganda) only partial stability is apparent. In event of a shock, Kenya will restore its long run equilibrium fastest, followed by Tanzania and Burundi.

• Item Type: MPRA Paper
• Language: English
• Keywords: Stable; demand for money; bounds test
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E41 - Demand for Money; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

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