Macroeconomic Shock Synchronization in the East African Community

Abstract:     
The East African Community (EAC) economic integration has gained momentum recently, with the EAC countries officially aiming to adopt a single currency in the summer of 2012. This paper assesses empirically the readiness of the EAC countries for monetary union. First, structural similarity of the EAC countries is measured in terms of intra-industry trade and similarity of production. Second, the symmetry of shocks among the EAC members is examined with structural VAR. Both methods show that the shock synchronization in the EAC is low, albeit increasing, suggesting that the move to EAMU should not be rushed. The paper concludes with policies that would facilitate the EAC regional economic integration, including the eventual establishment of monetary union.

Number of Pages in PDF File: 26

Keywords: shock synchronization, structural VAR, regional integration, East Africa

JEL Classification: E32, F42, C53

working papers series