Monetary union in West Africa and asymmetric shocks: A dynamic structural factor model approach

Abstract

This paper analyzes the economic costs of a monetary union in West Africa by looking at the fluctuations of aggregate demand and aggregate supply shocks across countries. Previous studies have estimated shocks with Vector Auto-Regressive (VAR) models. This paper discusses the limitations of VAR models and applies a new technique based on dynamic factor models. The results show negative and low positive correlations among supply shocks of West African countries, indicating that these countries will find it difficult to adjust to supply shocks if they form a monetary union. However, demand shocks are more similar among the French-speaking countries of the region.

A Literature Survey on Proposed African Monetary Unions

“…According to the author, about 85 percent of correlations in demand, supply and monetary shocks within the sub-region are asymmetric, whereas external or real exchange rate shocks have a symmetric tendency. The findings of Chuku align with those of Debrun et al (2015), Tsangarides and Qureshi (2008), Houssa (2008) and Alagidede et al (2012) illustrated a questionable OCA that is an embodiment of all candidate countries in the sub-region. Using a methodology based on the convergence criteria, Saka et al (2015) established evidence of income convergence.…”

“…In most studies within this strand of the literature, results are mixed with conclusions on viability (Ogunkola, 2005;Diop, 2012), impracticality (Debrun et al, 2005;Tsangarides & Qureshi, 2006;Houssa, 2008;Cham, 2009;Alagidede et al, 2012;Chuku, 2012;Dufrénot & Sugimoto, 2013;Asongu, 2013bHarvey & Cushing, 2015) and conditional feasibility (Bénassy-Quéré & Coupet, 2005;Bangaké, 2008;Ekpoh & Udoh, 2013;Asongu, 2014a;Saka et al, 2015). Ogunkola (2005) is quite optimistic about the viability of a currency zone in the ECOWAS region.…”

“…The recommendations of Diop (2007) are consistent with those of Ogunkola (2005) who had earlier expressed strong optimism with regards to the currency union, but also advised on further implementation of SAPs in candidate countries. Houssa (2008) has employed a dynamic factor model to show that a monetary union in the ECOWAS region would be costly from an economic standpoint based on asymmetric evidence of supply shocks between candidate countries. The author has also emphasised that the presence of some positive correlation in demand shocks is less relevant than supply shocks within a currency area because of its temporal effect on output.…”

State of Shocks Synchronization among Members of the GCC

“…This is because, for example, countries in a union may face asymmetric growths, then individual member countries under monetary union with common currency would not be able to handle through monetary policy. Similarly, a slow-growing country would put strain on the fast-growing country when they form monetary union (Houssa, 2008). Thus, similarities of growth rates among the aspiring member countries are conducive to form a monetary union.…”

Anchoring to the Euro (and Grouped Together)? The Case of African Countries

“…Examples of such assessments are found in Masson and Pattillo (2001), Debrun, Masson and Pattillo (2003, 2010, Khamfula and Huizinga (2004), Bénassy-Quéré and Coupet (2005), Buigut andValev (2005, 2006), Buigut (2006), Yehoue (2006, Houssa (2008), Masson (2008), Tsangarides and Qureshi (2008), and Carmignani (2009). 10 In our analysis, we focus exclusively on the WAEMU and on the CAEMC and check whether they are optimal monetary unions, using data only for the recent period of their peg to the euro.…”