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Idiosyncratic shocks in a currency union: Insights from West Africa

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  • Adjalala, Frida
  • Dissou, Yazid

Abstract

We develop a three-region dynamic stochastic general equilibrium model to investigate the effects of productivity shocks in the currency union proposed by the Economic Community of West African States (ECOWAS). We divide ECOWAS into three regions: Nigeria, the West African Economic and Monetary Union, and the rest of the zone. We investigate the responses to idiosyncratic productivity shocks in the presence of structural heterogeneity under two regimes: monetary independence and monetary union. Our results show that the signs and magnitudes of the effects of idiosyncratic shocks depend on the monetary regime. In the monetary independence regime, the nominal interest rate reacts differently in regions hit by the shock. While the affected region is negatively impacted, the other regions benefit. The monetary union regime amplifies the effects of the shocks, and under this regime, idiosyncratic productivity shocks do not impose a substantial welfare cost on its members.

Suggested Citation

  • Adjalala, Frida & Dissou, Yazid, 2023. "Idiosyncratic shocks in a currency union: Insights from West Africa," Economic Modelling, Elsevier, vol. 122(C).
    • Handle: RePEc:eee:ecmode:v:122:y:2023:i:c:s0264999323000536
    DOI: 10.1016/j.econmod.2023.106241
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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