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

22 Pages Posted: 21 Jul 2018

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Hector Carcel

University of Navarra - School of Economics

Luis A. Gil-Alana

University of Navarra - Department of Economics

Date Written: June 04, 2018

Abstract

This paper examines G-PPP and business cycle synchronization in the East Africa Community with the aim of assessing the prospects for a monetary union. The univariate fractional integration analysis shows that the individual series exhibit unit roots and are highly persistent. The fractional bivariate cointegration tests (see Marinucci and Robinson, 2001) suggest that there exist bivariate fractional cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and the Ugandan shilling. The FCVAR results (see Johansen and Nielsen, 2012) imply the existence of a single cointegrating relationship between the exchange rates of the EAC countries. On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree of business cycle synchronization between these economies. On both grounds, one can argue that a monetary union should be feasible.

Keywords: East Africa Community, monetary union, optimal currency areas, fractional integration and cointegration, business cycle synchronization, Hodrick-Prescott filter

JEL Classification: C220, C320, F330

Suggested Citation

Caporale, Guglielmo Maria and Carcel, Hector and Gil-Alana, Luis A., Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence (June 04, 2018). CESifo Working Paper Series No. 7073, Available at SSRN: https://ssrn.com/abstract=3212561

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
London
United Kingdom

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Hector Carcel

University of Navarra - School of Economics ( email )

Universidad de Navarra
Campus Universitario
Pamplona, 31009
Spain

Luis A. Gil-Alana

University of Navarra - Department of Economics ( email )

Campus de Arrosadia
Pamplona, 31006
Spain

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