Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence

Caporale, Guglielmo Maria; Gil-Alana, Luís A.

doi:10.1111/saje.12247

Cited by 3 publications

(5 citation statements)

References 23 publications

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“…However, a recent study by Hacker et al (2022) pointed out that decreasing correlations in inflation rates among the largest EAC countries could pose a challenge for the prospective union. On the other hand, Caporale et al (2020) found a meaningful business cycle synchronization in the EAC region provide strong support for the proposed single common currency union.…”

Section: Literature Reviewmentioning

confidence: 66%

Assessing the Viability of the East African Community as a Monetary Union

Senbeta,

Ganguli

2024

IJEF

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The objective of this paper is to evaluate the feasibility of the East African Community (EAC) in establishing a successful monetary union. Despite its strong interest and progress, the East African Community (EAC) faces substantial challenges in pursuing a single-currency monetary union. A careful examination of trade data and evaluation of the convergence criteria supports a cautious move toward forming a monetary union rather than its formation for political expediency. The compliance of EAC countries in achieving the target levels of the convergence criteria is, at best, mixed. Mainly, achieving low inflation rates, maintaining lower budget deficit-to-GDP and debt-to-GDP ratios, and building robust foreign reserves were weak. Despite the divergence among member countries in attaining a low and stable inflation rate, overall strong co-movement in inflation rates and the ability to maintain an average inflation rate near the target of eight percent is encouraging. External factors, such as rising financing costs, de-globalization efforts, and geopolitical tensions, complicate the establishment of a monetary union and create uncertainty about its potential benefits. In addition to these new developments, weak trade complementarity, inadequate cross-border infrastructure, expansive non-tariff barriers, and different degrees of compliance with convergence make a speedy move towards monetary union risky. Addressing these observed potential problems before monetary union via harmonization of investment and economic policies, creating robust institutions that foster trust and regional cooperation will mitigate economic and political rivalry and aid in forming an effective monetary union.

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Section: Literature Reviewmentioning

confidence: 66%

Assessing the Viability of the East African Community as a Monetary Union

Senbeta,

Ganguli

2024

IJEF

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“…Three VAR approaches, namely, Factor-Augmented, Bayesian and Structural, were employed by [53] while studying the dynamics in monetary policy influence for Burundi, Kenya, Rwanda, Tanzania and Uganda, with the conclusion that an adverse change in interest rate have a noticeable and favourable contribution in Burundi, Kenya and Rwanda but not in Tanzania and Uganda. Commenting on the formation of a monetary union for the EAC, Caporale and Gil-Alana [56] opined that monetary policy instruments have some roles to play in the proposed integration. This is an indication that macroeconomic activities within the region in relation to monetary policy variations are interwoven.…”

Section: Literature Reviewmentioning

confidence: 99%

Monetary Policy, External Shocks and Economic Growth Dynamics in East Africa: An S-VAR Model

2022

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Resulting from the incessant political and economic uncertainty that bedevils the EAC region in the recent past, the various governments have used monetary policy changes in response to shocks from macroeconomic variables. However, the available literature shows a non-agreement by scholars as far as the dynamics in monetary policy, external shocks and macroeconomic activity connections are concerned, for both country-by-country analyses and regional assessments. This article widens the frontiers of knowledge about how the dynamics of monetary policy, external shocks and macroeconomic performance interact within the EAC economic region. We adopted the S-VAR method because of its contemporary nature as far as a transmission of monetary policy approach is concerned. The interconnectivity among the countries of EAC is an indication that any shock to the price of commodities (non-oil commodities) has significant implication on the exchange rate, which will be channelled through the supply of money and monetary policy to the GDP. The need to diversify the productive and export base of member countries, compared to the continuous dependence on one or a few products as the major source of income, is hereby advocated.

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“…Some scholars propose the creation of the EAMU by providing evidence using different methods. For example, recent evidence by Caporale and Gil‐Alana (2020) argues that a monetary union should be feasible in the EAC considering the existence of a single cointegrating relationship between the exchange rates of the member states and a high degree of business cycle synchronisation between constituent economies. They employed fractional integration and cointegration models to examine generalised purchasing power parity (G‐PPP) and business cycle synchronisation in the EAC.…”

Section: Literaturementioning

confidence: 99%

“…Thus, differently, we not only examine the synchronisation of business cycles, but also study structural symmetries using sophisticated methods. Also, unlike other studies including the latest paper by Caporale and Gil‐Alana (2020), we recognise the importance of the current regional dynamics with key emphasis on structural parameters by expanding our scope and adding South Sudan into the regional sample despite data constraints.…”

Section: Introductionmentioning

confidence: 97%

“…East Africa has undertaken preliminary works through macroeconomic convergence and harmonisation of monetary and exchange rate policies, payment and settlement systems, financial sector supervision, as well as harmonised statistics to facilitate closer economic integration through trade, investment and factor mobility (Drummond et al ., 2014). Although recent studies by Caporale and Gil‐Alana (2020) provide guiding results, the existing empirical literature is generally simplistic and only stops at examining asymmetry of shocks and business cycles synchronisation without any attempts to employ superior econometric tools. Specifically, empirical studies directed at studying the EAMU inspired by Mundell (1961) mainly focus on the Bayoumi and Eichengreen (1992) framework to analyse the symmetry of shocks using Structural VARs which measure the correlation of supply shocks of various regions with those of an anchor region with very minimal further empirical emphasis.…”

Section: Introductionmentioning

confidence: 99%

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Business Cycles Synchronisation and Symmetries in the Transition to East African Monetary Union

Garang

Erkekoğlu

2020

South African J Economics

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Our paper explores the prospects for the proposed East African Monetary Union (EAMU) by employing rigorous empirical tools to analyse business cycles synchronisation, structural cross‐correlations, spectral decomposition and regional clusters to identify different cyclical episodes, periodicities and characterise the economic cycles of East African countries. We find that cyclical movements reflect various idiosyncratic, common, historical and external shocks in the region. Secondly, all countries appear to be structurally correlated with each other except for South Sudan and Burundi. Our results also observe that the contemporaneous co‐movements of East African Community (EAC) cycles with those of Kenya and Tanzaniaare procyclical with coincidental path shift, while the same EAC cycles appear to be acyclical with those of Burundi. Additionally, from the spectral decomposition, Kenyan cycles take 10 years to complete, while those of Tanzania and Rwanda take 8 years. Ugandan and Burundian cycles take approximately 5 years, while the cyclical frequency for South Sudan corresponds to 3.3 years. Finally, the cluster characterisation of countries reveals that South Sudan, Burundi and Rwanda form a group, while Kenya and Tanzania from a group distinct from the rest. We urge the member countries to prioritise policies on regional risk‐sharing and adjustment mechanisms, in addition to establishing credible institutional infrastructure that ensures surveillance and enforcement of convergence conditions adopted in EAMU protocol.

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Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence

Cited by 3 publications

References 23 publications

Assessing the Viability of the East African Community as a Monetary Union

Assessing the Viability of the East African Community as a Monetary Union

Monetary Policy, External Shocks and Economic Growth Dynamics in East Africa: An S-VAR Model

Business Cycles Synchronisation and Symmetries in the Transition to East African Monetary Union

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