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The Quest for a Monetary Union in ECOWAS: An Econometric Test for Convergence of Countries

In: Private Sector Development in West Africa

Author

Listed:
  • Mohamed Ben Omar Ndiaye

    (West African Monetary Agency (WAMA))

  • Robert Dauda Korsu

    (West African Monetary Agency (WAMA))

Abstract

The objective of the study is to investigate within an econometric framework the existence of nominal and real convergence among the ECOWAS countries, the WAMZ countries, the WAMZ countries plus Cape Verde, as well as between each non-UEMOA country and the UEMOA zone. Quarterly data from 2000 to 2010 on nominal exchange rate, interest rate, reserve money, inflation rate and budget deficit is used for nominal convergence testing while annual data on real GDP from 1975 to 2010 is used to obtain business cycle for real convergence testing. Unit root tests using the Dickey-Fuller GLS tests and cointegration tests in the context of the Johansen methodology are carried out. The results show that there is partial nominal convergence in reserve money among the WAMZ countries (with and without Cape Verde) as well as among the ECOWAS countries as a whole, but in terms of exchange rate it does not exist among the WAMZ though it exists among the WAMZ combined with Cape Verde only, as well as with Cape Verde and UEMOA. For the WAMZ as well as the ECOWAS as a whole, convergence in interest rate, budget deficit and inflation could not be determined. There is partial real convergence among the WAMZ countries (with and without Cape Verde) as well as the ECOWAS countries as a whole. On a bilateral basis, none of the non-UEMOA countries is in nominal or real convergence with the UEMOA, with the exception of the exchange rate convergence found with Cape Verde. The results suggest that the WAMZ countries or the ECOWAS countries may go into a monetary union on the basis of the convergence observed in reserve money (nominal convergence) and business cycle (real convergence). However, the operations of the monetary union should be organised such that there has to be a common money market, to ensure convergence in interest rate, a common fiscal rule for budget operation to ensure convergence in budget deficit, which should be monitored by a common regional committee and recognised by national parliaments. To ensure convergence in inflation, inflation should be the ultimate goal of monetary policy in the union, which does not imply leaving away financial sector stability and care for economic growth.

Suggested Citation

  • Mohamed Ben Omar Ndiaye & Robert Dauda Korsu, 2014. "The Quest for a Monetary Union in ECOWAS: An Econometric Test for Convergence of Countries," Advances in African Economic, Social and Political Development, in: Diery Seck (ed.), Private Sector Development in West Africa, edition 127, pages 31-59, Springer.
    • Handle: RePEc:spr:aaechp:978-3-319-05188-8_2
    DOI: 10.1007/978-3-319-05188-8_2
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