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Is East Africa an Optimum Currency Area?

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  • Mkenda, Beatrice Kalinda

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

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    Abstract

    The paper investigates whether the East African Community, comprising of Kenya, Tanzania, and Uganda, constitutes an optimum currency area or not. The East African Community has been revived, and one of the long-term objectives of the Community is to have a common currency. The paper employs the Generalised Purchasing Power Parity method, and various criteria suggested by the theory of Optimum Currency Areas to investigate the optimality of the Community as a currency area. While the various indices that we calculated based on the theory of Optimum Currency Areas gave mixed verdicts, the Generalised Purchasing Power Parity (G-PPP) method supports the formation of a currency union in the region.Using the G-PPP method, we were able to establish cointegration between the real exchange rates in East Africa for the period 1981 to 1998, and even for the period 1990 to 1998. This finding suggests that the three countries tend to be affected by similar shocks.

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    File URL: http://hdl.handle.net/2077/2675
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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 41.

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    Length: 52 pages
    Date of creation: 30 Apr 2001
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0041

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    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Related research

    Keywords: Optimum Currency Area; Cointegration; Purchasing Power Parity; East Africa; Kenya; Tanzania; Uganda.;

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    References

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    1. Horváth, Július & Grabowski, Richard, 1997. "Prospects of African Integration in Light of the Theory of Optimum Currency Areas," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 1-25.
    2. Bayoumi, Tamim & Eichengreen, Barry, 1998. "Exchange rate volatility and intervention: implications of the theory of optimum currency areas," Journal of International Economics, Elsevier, vol. 45(2), pages 191-209, August.
    3. Chantal Dupasquier & Jocelyn Jacob, 1997. "European economic and monetary union: Background and implications," Bank of Canada Review, Bank of Canada, vol. 1997(Autumn), pages 3-28.
    4. Meshack Tjirongo, 1995. "Short-term stabilization versus long-term price stability: evaluating Namibia's membership of the Common Monetary Area," CSAE Working Paper Series 1995-18, Centre for the Study of African Economies, University of Oxford.
    5. Jonung, Lars & Sjöholm, Fredrik, 1998. "Should Finland and Sweden Form a Monetary Union?," Working Paper Series in Economics and Finance 224, Stockholm School of Economics.
    6. Tamim Bayoumi & Jonathan David Ostry, 1995. "Macroeconomic Shocks and Trade Flows within Sub-Saharan Africa," IMF Working Papers 95/142, International Monetary Fund.
    7. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Economic Structure and the Decision to Adopt a Common Currency," Seminar Papers 611, Stockholm University, Institute for International Economic Studies.
    8. George S. Tavlas, 1993. "The ‘New’ Theory of Optimum Currency Areas," The World Economy, Wiley Blackwell, vol. 16(6), pages 663-685, November.
    9. Benjamin J. Cohen, 1993. "Beyond Emu: The Problem Of Sustainability," Economics and Politics, Wiley Blackwell, vol. 5(2), pages 187-203, 07.
    10. Baldwin, Richard E. & Venables, Anthony J., 1995. "Regional economic integration," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 31, pages 1597-1644 Elsevier.
    11. Enders, Walter & Hurn, Stan, 1994. "Theory and Tests of Generalized Purchasing-Power Parity: Common Trends and Real Exchange Rates in the Pacific Rim," Review of International Economics, Wiley Blackwell, vol. 2(2), pages 179-90, June.
    12. Bayoumi, Tamim & Ostry, Jonathan D, 1997. "Macroeconomic Shocks and Trade Flows within Sub-Saharan Africa: Implications for Optimum Currency Arrangements," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 412-44, October.
    13. Carolyn Jenkins & Lynne Thomas, 1997. "Is Southern Africa ready for regional monetary integration?," CSAE Working Paper Series 1997-03, Centre for the Study of African Economies, University of Oxford.
    14. De Grauwe, Paul & Vanhaverbeke, Wim, 1991. "Is Europe an Optimum Currency Area? Evidence from Regional Data," CEPR Discussion Papers 555, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Buigut, Steven K. & Valev, Neven T., 2005. "Is the proposed East African Monetary Union an optimal currency area? a structural vector autoregression analysis," World Development, Elsevier, vol. 33(12), pages 2119-2133, December.
    2. Peter Wilson & Choy Keen Meng, 2006. "Prospects For Enhanced Exchange Rate Cooperation in East Asia: Some Preliminary Findings from Generalized PPP Theory," SCAPE Policy Research Working Paper Series 0601, National University of Singapore, Department of Economics, SCAPE.
    3. Warin, Thierry & Wunnava, Phanindra V. & Tengia, Optat & Wandschneider, Kirsten, 2009. "Southern African Economic Integration: Evidence from an Augmented Gravity Model," IZA Discussion Papers 4316, Institute for the Study of Labor (IZA).
    4. Meredith A. McIntyre, 2005. "Trade Integration in the East African Community," IMF Working Papers 05/143, International Monetary Fund.

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