Do African Monetary Arrangements Make Sense? Evidence Based on Structural Symmetry

Abstract

Complete monetary unification in Africa is theoretically supported by the possibility of ex-post endogeneity of meeting optimum currency areas(OCA)criteria. Such endogeneity, if true, should already be reflected in decades-old existing African monetary unions, created without members meeting OCA criteria. This study redefines endogenous OCA criteria of regional arrangements as steady improvement in OCA criteria calculated for members relative to third countries and investigates such endogeneity benefits by analyzing the structural symmetry of business cycles between countries in a three-step process. First we test classical business cycles for increased similarity, using a sample of 60 countries with no a priori on the connection between those countries. Second, we analyze the transmission of deviation cycles among mix of countries using a vector autoregressive model. Finally, we check the strength of the bond among countries by looking at the connection between pairs of series of deviation cycles. We find that business cycles of countries in existing African monetary areas have not grown more homogenous, and that the bond among members of existing unions in Africa has mostly grown weaker than that between these same individual countries and their major trade partners.