This paper uses the business cycle synchronization criteria of the theory of optimum currency area (OCA) to examine the feasibility of the East African Community (EAC) as a monetary union. We also investigate whether the degree of business cycle synchronization has increased after the 1999 EAC Treaty. We use an unobserved component model to measure business cycle synchronization as the proportion of structural shocks that are common across different countries, and a time-varying parameter model to examine the dynamics of synchronization over time. We find that although the degree of synchronization has increased since 2000 when the EAC Treaty came into force, the proportion of shocks that is common across different countries is still small implying weak synchronization. This evidence casts doubt on the feasibility of a monetary union for the EAC as scheduled by 2012.

The East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a goal of a currency union, as part of a movement toward eventual political union. A key factor in making a currency union desirable is a high level of business cycle synchronization (BCS) among member countries. In this paper we undertake a new approach to this topic with a recently developed set of tools. These tools have the advantage of yielding time-varying estimates, and, unlike previous metrics, allow us to gauge both differences of the phase of the business cycle between countries and differences in business cycle amplitude. We find BCS among the five countries does compare reasonable well with that found for euro zone nations before euro adoption. However, given the euros' difficulties, this is not strong evidence in favor of the desirability of a currency union. Moreover, Rwanda appears less well-suited, in terms of BCS, than the other four countries. In addition, all five nations have experienced sharp drops in BCS in recent years. Lastly, there has been no significant increase in BCS since the 2000 EAC Treaty, or the 2005 customs union. Overall, our results cast doubt on the desirability of an East African currency union.

This paper examines how susceptible East African Community (EAC) economies are to asymmetric shocks, assesses the value of the exchange rate as a shock absorber for these countries, and reviews adjustment mechanisms that would help ensure a successful experience under a common currency. The report draws on analysis of recent experiences and examines likely future changes in the EAC economies.

Do changes in monetary policy affect inflation and output in the East African Community (EAC)? We find that (i) Monetary Transmission Mechanism (MTM) tends to be generally weak when using standard statistical inferences, but somewhat strong when using non-standard inference methods; (ii) when MTM is present, the precise transmission channels and their importance differ across countries; and (iii) reserve money and the policy rate, two frequently used instruments of monetary policy, sometimes move in directions that exert offsetting expansionary and contractionary effects on inflation—posing challenges to harmonization of monetary policies across the EAC and transition to a future East African Monetary Union. The paper offers some suggestions for strengthening the MTM in the EAC.

Countries of the Economic Community of West African States (ECOWAS) are heterogeneous, characterized by marked differences in production and export structures, divergent levels of inflation rates and fiscal positions. These features suggest that there is a greater tendency for the transmission of asymmetric shocks across member countries in the ECOWAS region. Understanding how well business cycles are synchronised between member countries is extremely important in designing appropriate policy responses to facilitate the launch of the single currency and reduce the cost of joining the proposed ECOWAS monetary union. This study undertakes a time-varying assessment of the degree of synchronisation of business cycles among ECOWAS member countries and analyses the role of bilateral trade, financial integration, and convergence in fiscal and monetary policy in achieving more synchronised business cycles in the region. Using the Hausman-Taylor and Error Components panel two-stage least squares (EC-2SLS) estimation techniques over the period 2001 - 2018, this study finds that well-coordinated policy responses such as the strengthening of trade linkages, convergence in fiscal policy and strong financial linkages would foster more closely synchronised business cycles across the region. Thus, measures to promote the synchronisation of business cycles and ensure the sustainable adoption of a single currency should focus not only on satisfying the macroeconomic convergence criteria, but also enhance trade and financial integration to foster broader policy coordination among countries in the region.

Countries of the Economic Community of West African States (ECOWAS) are heterogeneous, characterized by marked differences in production and export structures, divergent levels of inflation rates and fiscal positions. These features suggest that there is a greater tendency for the transmission of asymmetric shocks across member countries in the ECOWAS region. Understanding how well business cycles are synchronised between member countries is extremely important in designing appropriate policy responses to facilitate the launch of the single currency and reduce the cost of joining the proposed ECOWAS monetary union. This study undertakes a time-varying assessment of the degree of synchronisation of business cycles among ECOWAS member countries and analyses the role of bilateral trade, financial integration, and convergence in fiscal and monetary policy in achieving more synchronised business cycles in the region. Using the Hausman-Taylor and Error Components panel two-stage least squares (EC-2SLS) estimation techniques over the period 2001 - 2018, this study finds that well-coordinated policy responses such as the strengthening of trade linkages, convergence in fiscal policy and strong financial linkages would foster more closely synchronised business cycles across the region. Thus, measures to promote the synchronisation of business cycles and ensure the sustainable adoption of a single currency should focus not only on satisfying the macroeconomic convergence criteria, but also enhance trade and financial integration to foster broader policy coordination among countries in the region.