Are Proposed African Monetary Unions Optimal Currency Areas? Real, Monetary and Fiscal Policy Convergence Analysis

African Journal of Economics and Management Studies, 5(1), pp. 9-29 (2014).

31 Pages Posted: 10 Sep 2014 Last revised: 1 Apr 2015

See all articles by Simplice Asongu

Simplice Asongu

African Governance and Development Institute

Date Written: September 8, 2012

Abstract

Purpose – A spectre is hunting embryonic African monetary zones: the EMU crisis. This paper assesses real, monetary and fiscal policy convergence within the proposed WAM and EAM zones. The introduction of common currencies in West and East Africa is facing stiff challenges in the timing of monetary convergence, the imperative of central bankers to apply common modeling and forecasting methods of monetary policy transmission, as well as the requirements of common structural and institutional characteristics among candidate states.

Design/Methodology/Approach – In the analysis: monetary policy targets inflation and financial dynamics of depth, efficiency, activity and size; real sector policy targets economic performance in terms of GDP growth at macro and micro levels; while, fiscal policy targets debt-to-GDP and deficit-to-GDP ratios. A dynamic panel GMM estimation with data from different non-overlapping intervals is employed. The implied rate of convergence and the time required to achieve full (100%) convergence are then computed from the estimations.

Findings – Findings suggest overwhelming lack of convergence: (1) initial conditions for financial development are different across countries; (2) fundamental characteristics as common monetary policy initiatives and IMF backed financial reform programs are implemented differently across countries; (3) there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; (4) institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones; (5) absence of fiscal policy convergence and no potential for eliminating idiosyncratic fiscal shocks due to business cycle incoherence.

Practical Implications – As a policy implication, heterogeneous structural and institutional characteristics across countries are giving rise to different levels and patterns of financial intermediary development. Thus, member states should work towards harmonizing cross-country differences in structural and institutional characteristics that hamper the effectiveness of convergence in monetary, real and fiscal policies. This could be done by stringently monitoring the implementation of existing common initiatives and/or the adoption of new reforms programs.

Originality/Value – It is one of the few attempts to investigate the issue of convergence within the proposed WAM and EAM unions.

Keywords: Currency Area; Convergence; Policy Coordination; Africa

JEL Classification: F15; F36; F42; O55; P52

Suggested Citation

Asongu, Simplice, Are Proposed African Monetary Unions Optimal Currency Areas? Real, Monetary and Fiscal Policy Convergence Analysis (September 8, 2012). African Journal of Economics and Management Studies, 5(1), pp. 9-29 (2014). . Available at SSRN: https://ssrn.com/abstract=2493213 or http://dx.doi.org/10.2139/ssrn.2493213

Simplice Asongu (Contact Author)

African Governance and Development Institute ( email )

P.O. Box 8413
Yaoundé, 8413
Cameroon

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