Business Cycles Synchronisation and Symmetries in the Transition to East African Monetary Union

Abstract

Our paper explores the prospects for the proposed East African Monetary Union (EAMU) by employing rigorous empirical tools to analyse business cycles synchronisation, structural cross‐correlations, spectral decomposition and regional clusters to identify different cyclical episodes, periodicities and characterise the economic cycles of East African countries. We find that cyclical movements reflect various idiosyncratic, common, historical and external shocks in the region. Secondly, all countries appear to be structurally correlated with each other except for South Sudan and Burundi. Our results also observe that the contemporaneous co‐movements of East African Community (EAC) cycles with those of Kenya and Tanzaniaare procyclical with coincidental path shift, while the same EAC cycles appear to be acyclical with those of Burundi. Additionally, from the spectral decomposition, Kenyan cycles take 10 years to complete, while those of Tanzania and Rwanda take 8 years. Ugandan and Burundian cycles take approximately 5 years, while the cyclical frequency for South Sudan corresponds to 3.3 years. Finally, the cluster characterisation of countries reveals that South Sudan, Burundi and Rwanda form a group, while Kenya and Tanzania from a group distinct from the rest. We urge the member countries to prioritise policies on regional risk‐sharing and adjustment mechanisms, in addition to establishing credible institutional infrastructure that ensures surveillance and enforcement of convergence conditions adopted in EAMU protocol.

Convergence Triggers in Africa: Evidence from Convergence Clubs and Panel Models

“…Evolution of income levels and disparities form the bedrock of the convergence hypothesis. Specifically, alleviating income levels and reducing disparities is important in the context of regional integration because lack of necessary convergence makes it difficult for for countries to fairly trade and also poses them to country‐specific or asymmetric shocks (Eichengreen and Bayoumi, 1992; Arreaza et al ., 1998; Marco Buti, 1998; Sørensen and Yosha, 1998; Schils et al ., 2007; Drea and Jonung, 2010; Estrada et al ., 2013; Garang and Erkekoglu, 2020; Buti and Turrini, 2015). Thus, persistent differences amongst countries in Africa bring the question of heterogeneity to the attention of empirical studies on growth in Africa.…”