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Inflation differential in the West African Monetary Zone (WAMZ) area:Implications for unionization

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  • Balogun, Emmanuel Dele

Abstract

This paper examines the determinants of inflation differentials in a panel of West African Monetary Zone (WAMZ) states vis-à-vis its set benchmark for macroeconomic convergence since 2000 to date. Using a stylized 5-country model of WAMZ area, the differences in national inflation is analyzed in light of country specific shocks or differences in the monetary transmission mechanisms. The main results show macroeconomic (price) stabilization around a desired target was not attained. Over the sample period, the un-weighted average regional inflation rates were most often above a single digit target and vary widely among the countries. The major monetary policy instruments determinants of inflationary divergence are the pursuit of distorted interest rates, exchange rates overvaluation and expansionary monetary policies, which penalized credit and accentuated output supply/demand gaps.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13045.

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Date of creation: 27 Jan 2009
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Handle: RePEc:pra:mprapa:13045

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Keywords: Inflation differentials; price convergence; exchange rate; WAMZ members; panel data;

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  1. Angeloni, Ignazio & Ehrmann, Michael, 2004. "Euro area inflation differentials," Working Paper Series 0388, European Central Bank.
  2. Xavier Debrun & Paul Masson & Catherine Pattillo, 2005. "Monetary union in West Africa: who might gain, who might lose, and why?," Canadian Journal of Economics, Canadian Economics Association, vol. 38(2), pages 454-481, May.
  3. Guillaumont, Patrick & Guillaumont, Sylviane & Plane, Patrick, 1988. "Participating in African monetary unions: An alternative evaluation," World Development, Elsevier, vol. 16(5), pages 569-576, May.
  4. Paul R. Masson & Xavier Debrun & Catherine A. Pattillo, 2002. "Monetary Union in West Africa," IMF Working Papers 02/226, International Monetary Fund.
  5. Roman Horváth & Kamila Koprnická, 2008. "Inflation Differentials in EU New Member States: An Empirical Evidence," Working Papers IES 2008/24, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2008.
  6. Balogun, Emmanuel Dele, 2007. "Monetary policy and economic performance of West African Monetary Zone Countries," MPRA Paper 4308, University Library of Munich, Germany.
  7. Philip R. Lane & Patrick Honohan, 2003. "Divergent Inflation Rates in EMU," Trinity Economics Papers 20034, Trinity College Dublin, Department of Economics.
  8. Giancarlo Corsetti, 2008. "A Modern Reconsideration of the Theory of Optimal Currency Areas," European Economy - Economic Papers 308, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  9. Shang-Jin Wei, 1998. "Currency Hedging and Goods Trade," NBER Working Papers 6742, National Bureau of Economic Research, Inc.
  10. David Fielding & Kalvinder Shields, 2003. "Economic Integration in West Africa: Does the CFA Make a Difference?," Discussion Papers in Economics 03/8, Department of Economics, University of Leicester.
  11. Buiter, Willem H, 2000. "Optimal Currency Areas: Why Does The Exchange Rate Regime Matter?," CEPR Discussion Papers 2366, C.E.P.R. Discussion Papers.
  12. Alexander W. Hoffmaister, 1997. "Macroeconomic Fluctuations in Sub-Saharan Africa," IMF Working Papers 97/82, International Monetary Fund.
  13. Hofmann, Boris & Remsperger, Hermann, 2005. "Inflation differentials among the Euro area countries: Potential causes and consequences," Journal of Asian Economics, Elsevier, vol. 16(3), pages 403-419, June.
  14. Silvana Tenreyro, 2003. "On the trade impact of nominal exchange rate volatility," Working Papers 03-2, Federal Reserve Bank of Boston.
  15. David Fielding & Kalvinder Shields, 2003. "Do Currency Unions Deliver More Economic Integration than Fixed Exchange Rates? Evidence from the CFA and the ECCU," Discussion Papers in Economics 03/9, Department of Economics, University of Leicester.
  16. Fidrmuc, Jarko & Korhonen, Iikka, 2004. "A meta-analysis of business cycle correlation between the euro area and CEECs: What do we know – and who cares?," BOFIT Discussion Papers 20/2004, Bank of Finland, Institute for Economies in Transition.
  17. Paul Masson & Catherine Pattillo, 2002. "Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 11(3), pages 387-412, September.
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