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Inflation convergence and currency unions: the case of the East African community

Author

Listed:
  • Narayan Kishor
  • John Ssozi

Abstract

Purpose - The purpose of this paper is to investigate inflation convergence within the East African Community (EAC) as it aspires to become a currency union. Design/methodology/approach - An unobserved dynamic factor model was used to decompose the variation in inflation into a component that is common across the countries in the EAC region and a component that is country specific. Convergence was measured by the percentage of variation in inflation that is common across countries. Findings - The estimated results from the dynamic factor model for the pre-EAC Treaty (1981:3 to 2000:2) period and post-EAC Treaty (2000:3 to 2009:1) period suggest that the percentage variation in inflation in the EAC that is explained by the common regional component increased significantly during the post-Treaty period. Research limitations/implications - One of the limitations of this paper is that it does not address the mechanism through which the convergence in a currency union is achieved. Future research should try to examine the link between convergence and different macroeconomic policies. Practical implications - This paper suggests that the push towards forming a currency union in East Africa has led to a greater degree of inflation synchronization across different countries in the region. Originality/value - The main contribution of this paper is to use an unobserved component model to estimate the degree of inflation synchronization in East African countries.

Suggested Citation

  • Narayan Kishor & John Ssozi, 2010. "Inflation convergence and currency unions: the case of the East African community," Indian Growth and Development Review, Emerald Group Publishing, vol. 3(1), pages 36-52, April.
  • Handle: RePEc:eme:igdrpp:v:3:y:2010:i:1:p:36-52
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    Citations

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    Cited by:

    1. Simplice Asongu, 2016. "New empirics of monetary policy dynamics: evidence from the CFA franc zones," African Journal of Economic and Management Studies, Emerald Group Publishing, vol. 7(2), pages 164-204, June.
    2. Simplice A. Asongu, 2014. "Does money matter in Africa?: New empirics on long- and short-run effects of monetary policy on output and prices," Indian Growth and Development Review, Emerald Group Publishing, vol. 7(2), pages 142-180, November.
    3. Dridi, Jemma & Nguyen, Anh D. M., 2017. "Inflation Convergence In East African Countries," MPRA Paper 80393, University Library of Munich, Germany.

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