Business Cycle Synchronization and Optimum Currency Areas: The Case of the Economic Community of West African States

Abstract

This study analyzed the degree of business cycles' synchronization of ECOWAS economies in order to ascertain whether the formation of a broader monetary union in 2020 will be beneficial to the entire region. Annual real GDP growth rate from 1975 to 2015 was de-trended using the Hodrick-Prescott filter (HP) filter to obtain two components-permanent and transitory components. Lastly, cross country correlations of the different components were used to analyze the business cycles of ECOWAS economies. Result from the transitory component shows that the business cycles of WAEMU sub-economies are similar. But on a general note, the correlation coefficients of both components show that the business cycles of ECOWAS economies differ significantly, suggesting that, a broader monetary union involving both WAEMU and WAMZ economies will not be beneficial to the entire ECOWAS region. However, ECOWAS governments can take the risk of forming a monetary union in 2020 since a high probability of addressing a wide range of macroeconomic differentials across the region is incumbent on ex-post conditions, rather than on ex-ante prerequisite conditions that only focuses on the cost of relinquishing monetary autonomy.

Business Cycles Synchronization: Literature Review

“…While levels of synchronization have recovered, there are significant differences across countries in the time required to reach pre-crisis synchronization levels. Nkwatoh (2019) analyzed the degree of business cycle synchronization among Economic Community of West African States (ECOWAS) economies, using annual GDP growth rate data from 1975 to 2015. The study applied the Hodrick-Prescott (HP) filter and country correlations.…”