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Is the East African Community an Optimum Currency Area?

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  • Kishor, N. Kundan
  • Ssozi, John

Abstract

This paper investigates whether the East African Community (EAC) constitutes an optimum currency area (OCA) by estimating the degree and evolution of business cycle synchronization between the EAC countries. We also investigate whether the degree of business cycle synchronization has improved after signing of the EAC treaty in 1999. The degree of business cycle synchronization is estimated using an unobserved components model of structural shocks obtained from a structural VAR model. We then use a time-varying parameter model to estimate the evolution of business cycle synchronization. Our results indicate that the proportion of shocks that is common across different countries is small, implying weak synchronization. However, we also find that the degree of synchronization has improved after signing of the EAC treaty in 1999.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17645.

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Date of creation: 03 Oct 2009
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Handle: RePEc:pra:mprapa:17645

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Keywords: East African Community; Optimum Currency Area; Business Cycle Synchronization; Structural VAR; State-Space Model;

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References

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  1. Clark, Peter K., 1989. "Trend reversion in real output and unemployment," Journal of Econometrics, Elsevier, vol. 40(1), pages 15-32, January.
  2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  3. 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.
  4. Angeloni, Ignazio & Dedola, Luca, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 0004, European Central Bank.
  5. Lucio Castro, 2005. "Regional Trade Integration in East Africa: Trade and Revenue Impacts of the Planned East African Community Customs Union," International Trade 0509005, EconWPA.
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Cited by:
  1. Thomas Kigabo RUSUHUZWA & Paul Robert MASSON, 2012. "Design and Implementation of a Common Currency Area in the East African Community," Working Papers tecipa-451, University of Toronto, Department of Economics.
  2. Kuteesa, Annette, 2012. "East African Regional Integration: Challenges in meeting the convergence criteria for monetary union," Research Series 148956, Economic Policy Research Centre (EPRC).
  3. Durevall, Dick, 2011. "East African Community: Pre-conditions for an Effective Monetary Union," Working Papers in Economics 520, University of Gothenburg, Department of Economics.

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