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Are proposed African monetary unions optimal currency areas? Real, monetary and fiscal policy convergence analysis

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  • Simplice Asongu

Abstract

Purpose - – A spectre is hunting embryonic African monetary zones: the European Monetary Union crisis. The purpose of this paper is to assess 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 percent) convergence are then computed from the estimations. Findings - – Findings suggest overwhelming lack of convergence: initial conditions for financial development are different across countries; fundamental characteristics as common monetary policy initiatives and IMF-backed financial reform programs are implemented differently across countries; there is remarkable evidence of cross-country variations in structural characteristics of macroeconomic performance; institutional cross-country differences could also be responsible for the deficiency in convergence within the potential monetary zones; 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.

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  • Simplice Asongu, 2014. "Are proposed African monetary unions optimal currency areas? Real, monetary and fiscal policy convergence analysis," African Journal of Economic and Management Studies, Emerald Group Publishing Limited, vol. 5(1), pages 9-29, April.
  • Handle: RePEc:eme:ajemsp:v:5:y:2014:i:1:p:9-29
    DOI: 10.1108/AJEMS-02-2012-0010
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    Cited by:

    1. Asongu Simplice, 2013. "Does Money Matter in Africa? New Empirics on Long- and Short-run Effects of Monetary Policy on Output and Prices," Working Papers of the African Governance and Development Institute. 13/005, African Governance and Development Institute..
    2. Asongu Simplice, 2014. "Fresh Patterns of Liberalization, Bank Return and Return Uncertainty in Africa," Working Papers of the African Governance and Development Institute. 14/004, African Governance and Development Institute..
    3. Simplice Anutechia Asongu & Antonio Andrés, 2014. "Global trajectories, dynamics, and tendencies of business software piracy: benchmarking IPRs harmonization," AAYE Policy Research Working Paper Series 14_023, Association of African Young Economists, revised Nov 2014.
    4. Simplice A Asongu, 2013. "Modeling the future of knowledge economy: evidence from SSA and MENA countries," Economics Bulletin, AccessEcon, vol. 33(1), pages 612-624.
    5. Simplice A. Asongu, 2017. "The Comparative Economics of Knowledge Economy in Africa: Policy Benchmarks, Syndromes, and Implications," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(2), pages 596-637, June.
    6. Simplice A. Asongu, 2015. "Law,Finance, Economic Growth and Welfare: Why Does Legal Origin Matter?," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 7(2), pages 30-55, July.
    7. Simplice A. Asongu, 2014. "The “knowledge economy”–finance nexus in SSA and MENA countries," International Journal of Islamic and Middle Eastern Finance and Management, Emerald Group Publishing Limited, vol. 7(2), pages 200-213, June.
    8. Simplice A. Asongu, 2017. "Knowledge Economy Gaps, Policy Syndromes, and Catch-Up Strategies: Fresh South Korean Lessons to Africa," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 8(1), pages 211-253, March.
    9. Simplice A. Asongu, 2014. "Finance and Democracy in Africa," Institutions and Economies (formerly known as International Journal of Institutions and Economies), Faculty of Economics and Administration, University of Malaya, vol. 6(3), pages 92-116, October.
    10. Simplice A. Asongu, 2014. "Fighting African Capital Flight: Empirics on Benchmarking Policy Harmonization," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 11(1), pages 93-122, June.
    11. Simplice A Asongu, 2013. "A Short-run Schumpeterian Trip to Embryonic African Monetary Zones," Economics Bulletin, AccessEcon, vol. 33(1), pages 859-873.
    12. Simplice A Asongu, 2013. "The ‘Knowledge Economy'-finance nexus: how do IPRs matter in SSA and MENA countries?," Economics Bulletin, AccessEcon, vol. 33(1), pages 78-94.
    13. Simplice Asongu, 2014. "How Would Monetary Policy Matter In The Proposed African Monetary Unions? Evidence From Output And Prices," The African Finance Journal, Africagrowth Institute, vol. 16(2), pages 34-63.
    14. Simplice Asongu, 2016. "New empirics of monetary policy dynamics: evidence from the CFA franc zones," African Journal of Economic and Management Studies, Emerald Group Publishing Limited, vol. 7(2), pages 164-204, June.
    15. Simplice A. Asongu, 2014. "Real Effective Exchange Rate Imbalances and Macroeconomic Adjustments: evidence from the CEMAC zone," Research Africa Network Working Papers 14/019, Research Africa Network (RAN).
    16. NGUENA, Christian L., 2011. "Heterogeneity of Saving-Investment Causality and Fiscal Coordination Implication: The Case of an African Monetary Union," MPRA Paper 49411, University Library of Munich, Germany, revised 31 Aug 2013.
    17. Simplice Asongu, 2014. "REER Imbalances and Macroeconomic Adjustments in the Proposed West African Monetary Union," South African Journal of Economics, Economic Society of South Africa, vol. 82(2), pages 276-289, June.
    18. Simplice A, Asongu, 2012. "Fighting software piracy: which IPRs laws (treaties) matter in Africa?," MPRA Paper 43590, University Library of Munich, Germany.
    19. Abban, Stanley, 2020. "On the Computation and Essence of the Nominal Convergence Criteria for Africa Currency Union: ECOWAS in Perspective," MPRA Paper 100215, University Library of Munich, Germany, revised 10 May 2020.
    20. Christian Lambert NGUENA & Roger TSAFACK NANFOSSO, 2014. "Macroeconomic Factors and Dynamics of Financial Deepening: An empirical Investigation applied to the CEMAC Sub-region," Research Africa Network Working Papers 14/015, Research Africa Network (RAN).
    21. Simplice Asongu, 2014. "African Development: Beyond Income Convergence," South African Journal of Economics, Economic Society of South Africa, vol. 82(3), pages 334-353, September.
    22. Zouri, Stéphane, 2019. "Synchronisation des chocs d'offre et de demande dans la Communauté Economique des Etats de l'Afrique de l'Ouest (CEDEAO) [Synchronization of supply and demand shocks in the Economic Community of We," MPRA Paper 95291, University Library of Munich, Germany.

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    More about this item

    Keywords

    Africa; Convergence; Currency area; Policy coordination;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • P52 - Political Economy and Comparative Economic Systems - - Comparative Economic Systems - - - Comparative Studies of Particular Economies

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