A Fast-Track East African Community Monetary Union? Convergence Evidence from a Cointegration Analysis.

Abstract

There is a proposal for a fast-tracked approach to the African Community (EAC) monetary union. This paper uses cointegration techniques to determine whether the member countries would form a successful monetary union based on the long-run behavior of nominal and real exchange rates, the monetary base and real gdp. The four variables are each analyzed for co-movements among the five countries. The empirical results indicate only partial convergence for the variables considered, suggesting there could be substantial costs for the member countries from a fast-tracked process. This implies the EAC countries need significant adjustments to align their monetary policies and to allow a period of monetary policy coordination to foster convergence that will improve the chances of a sustainable currency union. th ordinary summit directed that the preparation for the establishment of a monetary union be moved into high gear upon the coming into operation of the common market. Macroeconomic convergence of member countries is crucial to the sustainability of a monetary union over the long term. Monetary policy convergence, exhibited mainly in similarity of inflation and interest rates among other indicators, is necessary to ensure a single monetary policy is optimal policy for all the union members. In an influential study Rose (2000) followed by others (a good summary is provided by Rose and Stanley, 2005), estimated that currency union enhances trade among member countries by two to three times. This boosts similarity of the demand patterns and price co-movements. Countries then could become more similar in a currency union than before currency union. If suitability for membership in a monetary union is endogenous, this suggests it may not be crucial for members to meet optimum currency area criteria before currency union. However recent assessment of the EMU experience (see Chintrakarn, 2008;Frankel, 2008) show a much smaller trade impact of the Euro of only about 15%. The endogeneity effect may even be smaller for African monetary unions. Carmignani (2009) and Tapsoba (2009) study the endogeneity effect of trade in African monetary unions and find that currency union increases synchronicity of business cycles but the effect is very small. While trade effects and endogeneity cannot be discounted, these subsequent results cautions against excessive optimism on the magnitude of the effects from an EAC monetary union. First, the trade effect benefits seem to be slow to achieve (about 15% from EMU nearly ten years later). Secondly, the EAC countries are starting from relatively low intra-EAC trade levels. Given the high dependency on primary product exports, the scope for increased trade is unlikely to be as great as more developed countries. (Note 4) Therefore this makes convergence before monetary union critical for the EAC to minimize any adverse effects from a loss of monetary policy for member countries. No specific enforceable convergence targets have been laid down for eligibility in the proposed EAMU. It is h...

Regime-Dependent Monetary Policy Convergence: The Case of Southern African Development Community (SADC)

“…They found evidence in support of stochastic convergence between German interest rates and those for Croatia, Estonia, Hungary, Romania, Slovak Republic and Turkey. Buigut (2011) investigated the feasibility of a monetary union for members of the East African Community (EAC) using cointegration analysis. He found evidence of partial monetary convergence among EAC member countries namely -Kenya, Tanzania, Uganda, Rwanda, and Burundi.…”

A Literature Survey on Proposed African Monetary Unions

“…(ii) an anti-thesis on papers that have recommended against the common currency area (Buigut, 2011;Rusuhuzwa & Masson, 2012;Davoodi et al, 2013;Mafusire & Brixiova, 2013;Lepetit et al, 2014;Asongu, 2014bc) and (iii) a synthesis for inquiries that have presented a case for the monetary zone, contingent on substantial policy efforts from candidate countries (Buigui & Valev, 2005 ;Falagiarda, 2010;Kishor & Ssozi, 2011;Sheik et al, 2011). From an initial assessment, like with the case of the WAMU, we find that empirical results and corresponding recommendations differ by authors, periodicity, sampled countries and methodology.…”

“…First, Buigut (2011) has used techniques of cointegration to assess if candidate members of the EAC make-up a feasible monetary union. Using exchange rates and monetary base, the study concludes that there is an existence of partial convergence.…”

A Literature Survey on Proposed African Monetary Unions

“…We summarise in Table empirical studies on the proposed EAMU in a chronology that is consistent with Hegelian dialectics, notably: (i) a thesis on studies presenting a case for the monetary union (Mkenda, ; Bangaké, ; Asongu, ), (ii) an anti‐thesis on papers that have recommended against the common currency area (Buigut, ; Rusuhuzwa and Masson, ; Davoodi et al ., ; Mafusire and Brixiova, ; Lepetit et al ., ; Asongu, , ) and (iii) a synthesis for inquiries that have presented a case for the monetary zone, contingent on substantial policy efforts from candidate countries (Buigui and Valev, ; Falagiarda, ; Kishor and Ssozi, ; Sheik et al ., ). From an initial assessment, as with the case of the WAMU, we find that empirical results and corresponding recommendations differ by authors, periodicity, sampled countries and methodology.…”