Business Cycle Synchronization: A Reassessment of the Optimum Currency Area Theory within the CFA Franc Zone

Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries?

“…Macroeconomic policy coordination is crucial for further integration and currency unification. Similar fiscal and monetary policies tend to synchronize comovements in demand disturbances as they lead to correlated fiscal and monetary shocks (Samba & Mbassi, 2019). Even though CAPADR countries have undertaken some efforts in terms of policy cooperation, differences are still the rule rather than the exception (for example, exchange rate systems).…”

“…More recently, Samba & Mbassi (2019) evaluate the synchronization of business cycles within the CFA Franc zone for the period 1990-2013 by extracting demand and supply shocks, complemented with an indicator of dispersion. As for supply shocks, most of the correlation ratios between individual countries and the aggregate currency area turn out to be positive and relatively high.…”

“…where x it denotes the demand or supply shock series, N the number of countries, and ω it the respective weight. As per Crespo-Cuaresma & Fernández-Amador (2013) and Samba & Mbassi (2019), we consider that the structural shock behavior approximates business cycle movements. Following Cardoza & Izaguirre (2021), we employ GDP, Power Purchasing Parity data from the World Bank for the construction of these weights (see Table A2).…”

“…Following Cardoza & Izaguirre (2021), we employ GDP, Power Purchasing Parity data from the World Bank for the construction of these weights (see Table A2). Since we can define convergence as a decrease of the standard deviation of the structural shocks across the countries considered, a smaller value of S t implies a higher symmetry of shocks and a greater level of synchronization of business cycles among candidate countries (Samba & Mbassi, 2019).…”

“…8 Interestingly, two pairs of countries -Panama and El Salvador, and Dominican Republic and Honduras-depict significant negative relationships between their supply shocks series. Empiric literature points out differences in economic structure and labor market institutions, lack of fiscal discipline, as well as dissimilarities in trade specialization patterns as some possible drivers for such an outcome (Samba & Mbassi, 2019). It is worth mentioning that Panama presents the lowest correlations with the rest of the countries (-0.027 on average), possibly due to its more diversified economic structure.…”