Exchange Rate Policies and Monetary Union Effectiveness in the East Africa Community
57 Pages Posted: 22 Mar 2016
Date Written: March 17, 2016
This paper assesses the effectiveness of East Africa Monetary Union under alternative exchange rate policies. We model four types of exchange rate policies in a two-open economy Dynamic Stochastic General Equilibrium model with financial micro-foundations. Findings reveal that floating exchange rate policy is preeminent for East Africa monetary union effectiveness. Partner states case study demonstrates that, first, wealth effect expansionary features are not driven under pegged exchange rate policy. Second, monetary policy transmission mechanism is ambiguous under target zone exchange rate policy. Third, Fisher effect dampening impact arises under managed floating exchange rate policy and lasts over time.
Keywords: Exchange Rate Policies, Monetary Union Effectiveness, DSGE model, EAC
JEL Classification: C61, E44, E52, F33
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