Financial Integration in the Common Monetary Area*

Abstract

This paper assesses the level of financial integration within the CMA countries, using the concept of the uncovered interest rate parity. The impact of foreign interest rates on the domestic interest rates, in this case the South African rates on the rates of the LNS countries, is analysed. For comparative purposes, other neighbouring countries such as Botswana, Zambia and Zimbabwe are brought into the analysis. The results from the uncovered interest rate parity approach show that Lesotho, Namibia and Swaziland can be considered to be well financially integrated with the South African market, while for Botswana, Zambia and Zimbabwe it shows the contrary.

Banking Market Integration in the SADC Countries: Evidence from Interest Rate Analyses

“…However, in Namibia, where the domestic policy seems to be more effective, a single central bank may actually lower the speed of the monetary transmission process. These findings are in line with Nielsen et al (2005) who use the concept of the uncovered interest rate parity to assess the level of financial integration within the CMA plus Botswana, Zambia and Zimbabwe. Using both rolling unit root tests and a moving regression that enable them to examine the degree of financial integration over time, they find that Lesotho, Namibia and Swaziland are well financially integrated with South African market while the other countries are not.…”

“…The existing empirical studies on interest rates in Southern Africa focus either on measuring integration by interest rate co-movement (Aziakpono, 2006a and2006b;Nielsen et al, 2005) or on measuring the PT (Sander and Kleimeier, 2006). Aziakpono (2006b) and Nielsen et al (2005) investigate the behavior of national interest rates by using the interest rate parity as an indicator of integration. Aziakpono's (2006b) findings reveal a high level of dependence of the other SACU countries' financial systems on South Africa's and he thus concludes that a monetary unification with a single central bank (South African Reserve Bank) and monetary policy for the union is feasible.…”

“…They thus confirm the finding of Aziakpono (2006a) and the validity of the SADH. Existing studies focus on the CMA or SACU countries, with exception of Nielsen et al (2005) who included Zambia and Zimbabwe. None of the studies have investigated the extent of integration across the entire set of SADC countries.…”

Impact of South Africa's Monetary Policy on the LNS Economies

“…The results are sensitive to the frequency of the data, the ordering of the variables and the inclusion of other variables in the system. In particular, the ordering we have chosen apart from the conformity to empirical observation, tends to be close to the findings in the literature especially when interest rates are part of the variables in the system and the observation is monthly (Porter and Offenbacher, 1983). Finally, it must be reiterated that the purpose of this study is not to resolve the (equally important) issue of the robustness of the VAR estimation 7 but explain how repo rate underlines changes in credit, money supply and level of prices in the LNS economies and hence highlight the importance of South African monetary policy for monetary arrangement in the CMA.…”

“…The ordering of variables in a VAR has been a subject of much controversy in the literature since alternative orderings may influence the explanatory powers of our equations. Specifically, it has been argued that the importance of a given variable in terms of the extent to which its innovations influence other variables may depend critically on the (arbitrary) ordering that is chosen (Porter and Offenbacher, 1983). We were guided on imposing this particular (arbitrary) causal ordering by, first, our knowledge of the behaviour of We however discovered that the ordering of the variables did not alter our results.…”