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


  • Narayan Kishor
  • John Ssozi


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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    References listed on IDEAS

    1. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November.
    2. King, Robert G & Watson, Mark W, 2002. "System Reduction and Solution Algorithms for Singular Linear Difference Systems under Rational Expectations," Computational Economics, Springer;Society for Computational Economics, vol. 20(1-2), pages 57-86, October.
    3. Heer, Burkhard & Maußner, Alfred, 2008. "Computation Of Business Cycle Models: A Comparison Of Numerical Methods," Macroeconomic Dynamics, Cambridge University Press, vol. 12(05), pages 641-663, November.
    4. Aruoba, S. Boragan & Fernandez-Villaverde, Jesus & Rubio-Ramirez, Juan F., 2006. "Comparing solution methods for dynamic equilibrium economies," Journal of Economic Dynamics and Control, Elsevier, vol. 30(12), pages 2477-2508, December.
    5. Burkhard Heer & Alfred Maussner, 2006. "Business Cycle Dynamics of a New Keynesian Overlapping Generations Model with Progressive Income Taxation," CESifo Working Paper Series 1692, CESifo Group Munich.
    6. Robin Brooks, 2002. "Asset-Market Effects of the Baby Boom and Social-Security Reform," American Economic Review, American Economic Association, vol. 92(2), pages 402-406, May.
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    Cited by:

    1. 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.
    2. 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.
    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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