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Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks

Author

Listed:
  • Asta Ndongo

    (Center for Applied Economic Research, Cheikh Anta Diop University)

  • Ibrahima Thione Diop

    (Faculty of Economics and Management, Cheikh Anta Diop University)

Abstract

This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.

Suggested Citation

  • Asta Ndongo & Ibrahima Thione Diop, 2021. "Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 7(2), pages 61-87, December.
  • Handle: RePEc:ana:journl:v:7:y:2021:i:2:p:61-87
    DOI: 10.22440/wjae.7.2.3
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    More about this item

    Keywords

    Monetary integration; Macroeconomic shocks; Impulse response function; Forecast error variance decomposition;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F15 - International Economics - - Trade - - - Economic Integration
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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