Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa

Abstract

This paper aims to study the optimality of a monetary union in West Africa by using a new methodology based on the analysis of convergence and co-movements between exchange rate misalignments. Two main advantages characterize this original framework. First, it brings together the information related to several optimum currency area criteriasuch as price convergence, terms of trade shocks, and trade and fiscal policies-going further than previous studies which are mainly based on only one criterion at a given time. Second, our study detects potential competitiveness differentials which play a key role in the debate on the optimality or not of a monetary union, as evidenced by the recent crisis in the Euro area. Relying on recent panel cointegration techniques and cluster analysis, our results show that the WAEMU area has a core composed by Burkina Faso, Mali, Niger and Senegal which can be joined by Ghana, Sierra Leone and, to a lesser extent, Gambia, and that Ghana and Senegal appear to be the best reference countries for the creation of the whole West Africa monetary union.

A Literature Survey on Proposed African Monetary Unions

“…Heterogeneity in African countries has brought about an important concern of geography in the objective of currency unions first raised by Masson and Patillo (). Consistent with Coulibaly and Gnimassoun (), we argue here that due to economic asymmetries, it is relevant to investigate potential suitable geographical zones that can form a monetary area in Africa.…”

“…Coulibaly and Gnimassoun () have employed a new methodology to assess the optimality of a monetary union in West Africa. Using an estimation technique based on catch‐up, co‐movements between misalignments in exchange and cluster analysis, the findings show that the WAEMU, which is the most homogeneous zone in Western and Central Africa, can be joined by the Gambia and Ghana and to a lesser extent Sierra Leone.…”

“…This includes identification of clusters or direct disqualification of some candidate countries. For instance, (i) Nigeria's membership in the WAMU has been consistently questioned (Debrun et al, 2005;Bénassy-Quéré and Coupet, 2005;Masson, 2006Masson, , 2008Bangaké, 2008), while (ii) Ghana and the Gambia are ripe to join the WAEMU (Coulibaly and Gnimassoun, 2013).…”

A Literature Survey on Proposed African Monetary Unions

“…This includes identification of clusters or direct disqualification of some candidate countries. For instance: (i) Nigeria's membership in the WAMU has been consistently questioned (Debrun et al, 2005;Bénassy-Quéré & Coupet, 2005;Masson, 2006Masson, , 2008Bangaké, 2008;Coulibaly & Gnimassoun, 2013), (ii) Burundi and Rwanda (Mkenda, 2001;Bangaké, 2008) and Rwanda (Sheik et al, 2011;Lepetit et al, 2014) are respectively excluded based on an old EAC or a new EAC sample, (iii) In the SAMU, joining the CMA by SADC members is beneficial to all, with the exception of Angola, Tanzania and Mauritius and a SADC-wide symmetric currency area continues to be beneficial for all, without…”

A Diagnostic on the West African Monetary Union

“…The study concludes that significant heterogeneity in character exists and that inflation shocks are asymmetric between certain members. In another respect, Coulibaly and Gnimassoun () identify competitiveness differential as a factor to currency area optimality, that the WAEMU is the most homogeneous area in Central and Western Africa, and that WAEMU could be joined by Ghana and Gambia.…”