IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2021-06-2.html
   My bibliography  Save this article

Monetary Union Feasibility in the East African Community: Evidence from GPPP

Author

Listed:
  • Ephrem Habtemichael Redda

    (Faculty of Economic and Management Sciences, North-West University, Vanderbijlpark, South Africa,)

  • Paul-Francois Muzindutsi

    (School of Accounting, Economics and Finance, University of KwaZulu-Natal, South Africa.)

Abstract

This study utilises the generalised purchasing power parity (GPPP) to assess the feasibility of a monetary union in the East African Community (EAC) region. Time series and panel vector error correction models (VCM) were used to analyse monthly data from 1996-2016 for the five EAC countries. The cointegration results support the existence of a long-run relationship between the tested variables, providing evidence for the optimum currency area (OCA) and the feasibility of monetary union in the EAC region. The VECM results indicate some differences in the size of the coefficients, suggesting that any change/shock of real exchange rate in the region may cause unintended currency flow from one country to the other in the short run, and this may constrain the possibility of an effective and efficient monetary union. Therefore, member countries should harmonise their monetary policies well ahead of the implementation of the monetary union the region.

Suggested Citation

  • Ephrem Habtemichael Redda & Paul-Francois Muzindutsi, 2021. "Monetary Union Feasibility in the East African Community: Evidence from GPPP," International Journal of Economics and Financial Issues, Econjournals, vol. 11(6), pages 9-16.
    • Handle: RePEc:eco:journ1:2021-06-2
    as

    Download full text from publisher

    File URL: https://www.econjournals.com/index.php/ijefi/article/download/11846/pdf
    Download Restriction: no
    File URL: https://www.econjournals.com/index.php/ijefi/article/view/11846/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Dellas, Harris & Tavlas, George S., 2009. "An optimum-currency-area odyssey," Journal of International Money and Finance, Elsevier, vol. 28(7), pages 1117-1137, November.
    2. repec:cup:cbooks:9781107034662 is not listed on IDEAS
    3. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    4. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    5. Roland Vaubel, 1976. "Real exchange-rate changes in the European community: The empirical evidence and its implications for European currency unification," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 112(3), pages 429-470, September.
    6. Enders, Walter & Hurn, Stan, 1997. "Common trends and generalized purchasing power parity," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 43(3), pages 437-443.
    7. Su, Jen-Je & Cheung, Adrian (Wai-Kong) & Roca, Eduardo, 2014. "Does Purchasing Power Parity hold? New evidence from wild-bootstrapped nonlinear unit root tests in the presence of heteroskedasticity," Economic Modelling, Elsevier, vol. 36(C), pages 161-171.
    8. Ms. Iyabo Masha & Mr. Leighton S Harris & Mr. Jian-Ye Wang & Ms. Kazuko Shirono, 2007. "The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Challenges," IMF Working Papers 2007/158, International Monetary Fund.
    9. Brooks,Chris, 2014. "Introductory Econometrics for Finance," Cambridge Books, Cambridge University Press, number 9781107661455, December.
    10. Adom, Assandé Désiré & Sharma, Subhash C. & Morshed, A.K.M. Mahbub, 2010. "Economic integration in Africa," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(3), pages 245-253, August.
    11. Fleming, J Marcus, 1971. "On Exchange Rate Unification," Economic Journal, Royal Economic Society, vol. 81(323), pages 467-488, September.
    12. Kim, Bong-Han & Kim, Hong-Kee & Oh, Keun-Yeob, 2009. "The purchasing power parity of Southeast Asian currencies: A time-varying coefficient approach," Economic Modelling, Elsevier, vol. 26(1), pages 96-106, January.
    13. Mishra, Ritesh Kumar & Sharma, Chandan, 2010. "Real exchange rate behavior and optimum currency area in East Asia: Evidence from Generalized Purchasing Power Parity," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 205-213, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. EPHREM HABTEMICHAEL REDDA & Paul-Francious Muzindusti, 2017. "Does SADC constitute an optimum currency area? Evidence from generalised purchasing power parity," Proceedings of Economics and Finance Conferences 4807771, International Institute of Social and Economic Sciences.
    2. de Truchis, Gilles & Keddad, Benjamin, 2013. "Southeast Asian monetary integration: New evidences from fractional cointegration of real exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 26(C), pages 394-412.
    3. Naib ALAKBAROV & Utku UTKULU, 2020. "Asymmetries and Macroeconomic Shocks: The Pre-Crisis Period and Evidence for Europe," Sosyoekonomi Journal, Sosyoekonomi Society, issue 28(44).
    4. Mishra, Ritesh Kumar & Sharma, Chandan, 2010. "Real exchange rate behavior and optimum currency area in East Asia: Evidence from Generalized Purchasing Power Parity," International Review of Financial Analysis, Elsevier, vol. 19(3), pages 205-213, June.
    5. Vassilis Monastiriotis & Cigdem Borke Tunali, 2020. "The Sustainability of External Imbalances in the European Periphery," Open Economies Review, Springer, vol. 31(2), pages 273-294, April.
    6. M. J. Aziakpono & S. Kleimeier & H. Sander, 2012. "Banking market integration in the SADC countries: evidence from interest rate analyses," Applied Economics, Taylor & Francis Journals, vol. 44(29), pages 3857-3876, October.
    7. Frauke Dobnik, 2013. "Long-run money demand in OECD countries: what role do common factors play?," Empirical Economics, Springer, vol. 45(1), pages 89-113, August.
    8. Kaewnern, Hathaipat & Wangkumharn, Sirikul & Deeyaonarn, Wongsathon & Yousaf, Abaid Ullah & Kongbuamai, Nattapan, 2023. "Investigating the role of research development and renewable energy on human development: An insight from the top ten human development index countries," Energy, Elsevier, vol. 262(PB).
    9. Salah A Nusair, 2017. "On the Nominal and Real Currency Devaluation Nexus in European Transition Economies," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(4), pages 677-698, September.
    10. Muhammad Shahbaz & Mete Feridun, 2012. "Electricity consumption and economic growth empirical evidence from Pakistan," Quality & Quantity: International Journal of Methodology, Springer, vol. 46(5), pages 1583-1599, August.
    11. Andrea Bonilla‐Bolaños, 2021. "A step further in the theory of regional integration: A look at the South American integration strategy," Journal of International Development, John Wiley & Sons, Ltd., vol. 33(5), pages 845-873, July.
    12. Devi Prasad DASH & Debi Prasad BAL & Manoranjan SAHOO, 2016. "Nexus between defense expenditure and economic growth in BRIC economies: An empirical investigation," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(1(606), S), pages 89-102, Spring.
    13. Khatereh SADEGHZADEH, 2018. "The effects of microeconomic factors on the stock market: A panel for the stock exchange in Istanbul ARDL analysis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(616), A), pages 113-134, Autumn.
    14. Mowshumi Sharmin & Mohammad Tareque, 2018. "Econometric Analysis of the Effect of Economic Globalization, Energy Intensity, Urbanization, Industrialization and Growth on CO2 Emissions of Bangladesh," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 16(4 (Winter), pages 335-354.
    15. Pao, Hsiao-Tien & Tsai, Chung-Ming, 2011. "Multivariate Granger causality between CO2 emissions, energy consumption, FDI (foreign direct investment) and GDP (gross domestic product): Evidence from a panel of BRIC (Brazil, Russian Federation, I," Energy, Elsevier, vol. 36(1), pages 685-693.
    16. Hakimi, Abdelaziz & Hamdi, Helmi, 2016. "Trade liberalization, FDI inflows, environmental quality and economic growth: A comparative analysis between Tunisia and Morocco," Renewable and Sustainable Energy Reviews, Elsevier, vol. 58(C), pages 1445-1456.
    17. Zeyneb GUELLIL & Fatima Zohra MAROUF & Mohammed Benbouziane, 2017. "Exchange Rate Regimes and Economic Growth in Developing Countries: An Empirical Study Using Panel Data from 1980 to 2013," MIC 2017: Managing the Global Economy; Proceedings of the Joint International Conference, Monastier di Treviso, Italy, 24–27 May 2017,, University of Primorska Press.
    18. Nafeesa Yunus, 2023. "Co‐movement among oil, stock, bond, and housing markets: An analysis of U.S., Asian, and European economies," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 393-436, June.
    19. Patrick PLANE & Ridha NOUIRA & SEKKAT, 2010. "Exchange Rate Undervaluation to Foster Manufactured Exports: A Deliberate Strategy?," Working Papers 201010, CERDI.
    20. Paul Francois Muzindutsi & Sinethemba Mposelwa, 2016. "Testing the Expectations Hypothesis of the Term Structure of Interest Rates in Brics Countries: A Multivariate Co-integration Approach," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 12(4), pages 289-304, October.

    More about this item

    Keywords

    East African Community; Monetary Union; GPPP; Optimum Currency Area.;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2021-06-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.