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Correlations of structural shocks, dynamic responses of output and inflation to commodities price shocks and monetary union in WAMZ

Author

Listed:
  • Yahuza Abdul Rahman
  • Anthony Kofi Osei-Fosu
  • Daniel Sakyi

Abstract

Purpose - This paper examines correlations of the underlying structural shocks and the degree of synchronization in the impulse responses of output, inflation and trade to a one standard deviation shock to non-oil commodities price index and exchange rates within the West African Monetary Zone (WAMZ) countries from 1990q1 to 2020q1. Design/methodology/approach - This paper uses the structural vector autoregressive model to isolate the underlying structural shocks and compares them with the West African Monetary Union (WAEMU) countries. Findings - Findings from the study suggest that correlations of underlying structural shocks are more profound in the WAEMU than in the WAMZ. Impulse responses of output to price and exchange rate shocks are more symmetric in the WAEMU than in the WAMZ. However, impulse responses of inflation to price and exchange rate shocks are symmetric in the WAMZ than in the WAEMU and responses of trade in both sub-groups are not uniform. Practical implications - The paper concludes that the WAMZ does not constitute an Optimum Currency Area concerning the correlations of the structural shocks and output. However, it has achieved convergence in inflation and there are adequate adjustment mechanisms to shocks in the WAMZ than in the WAEMU. Therefore, the WAMZ may not suffer from joining the monetary union. Thus, economic Community of West African States may take steps to roll out the monetary union. Originality/value - The paper examines correlations of the underlying structural shocks, impulse responses of output and inflation to shocks to commodities price and exchange rates in the WAMZ and compares them with the WAEMU.

Suggested Citation

  • Yahuza Abdul Rahman & Anthony Kofi Osei-Fosu & Daniel Sakyi, 2023. "Correlations of structural shocks, dynamic responses of output and inflation to commodities price shocks and monetary union in WAMZ," African Journal of Economic and Management Studies, Emerald Group Publishing Limited, vol. 15(3), pages 419-439, December.
  • Handle: RePEc:eme:ajemsp:ajems-04-2023-0129
    DOI: 10.1108/AJEMS-04-2023-0129
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    More about this item

    Keywords

    Optimum currency areas; Commodities price shocks; Symmetric shocks; West African Monetary Zone; C32; E32; F02; F15;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F15 - International Economics - - Trade - - - Economic Integration

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