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The East African Monetary Union: Is the Level of Business Cycle Synchronization Sufficient?

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  • William Miles

Abstract

The East African Community (Burundi, Kenya, Rwanda, Tanzania and Uganda) has a goal of a currency union, as part of a movement toward eventual political union. A key factor in making a currency union desirable is a high level of business cycle synchronization (BCS) among member countries. In this paper we undertake a new approach to this topic with a recently developed set of tools. These tools have the advantage of yielding time-varying estimates, and, unlike previous metrics, allow us to gauge both differences of the phase of the business cycle between countries and differences in business cycle amplitude. We find BCS among the five countries does compare reasonable well with that found for euro zone nations before euro adoption. However, given the euros¡¯ difficulties, this is not strong evidence in favor of the desirability of a currency union. Moreover, Rwanda appears less well-suited, in terms of BCS, than the other four countries. In addition, all five nations have experienced sharp drops in BCS in recent years. Lastly, there has been no significant increase in BCS since the 2000 EAC Treaty, or the 2005 customs union. Overall, our results cast doubt on the desirability of an East African currency union.

Suggested Citation

  • William Miles, 2015. "The East African Monetary Union: Is the Level of Business Cycle Synchronization Sufficient?," Applied Economics and Finance, Redfame publishing, vol. 2(4), pages 115-125, November.
  • Handle: RePEc:rfa:aefjnl:v:2:y:2015:i:4:p:115-125
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    References listed on IDEAS

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    1. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
    2. Siem Jan Koopman & João Valle E Azevedo, 2008. "Measuring Synchronization and Convergence of Business Cycles for the Euro area, UK and US," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(1), pages 23-51, February.
    3. Narayan K. Kishor & John Ssozi, 2011. "Business Cycle Synchronization in the Proposed East African Monetary Union: An Unobserved Component Approach," Review of Development Economics, Wiley Blackwell, vol. 15(4), pages 664-675, November.
    4. Xu, Xinpeng, 2006. "A currency union for Hong Kong and Mainland China?," Journal of International Money and Finance, Elsevier, vol. 25(6), pages 894-911, October.
    5. Buigut, Steven K. & Valev, Neven T., 2005. "Is the proposed East African Monetary Union an optimal currency area? a structural vector autoregression analysis," World Development, Elsevier, vol. 33(12), pages 2119-2133, December.
    6. Thomas D. Willett & Orawan Permpoon & Clas Wihlborg, 2010. "Endogenous OCA Analysis and the Early Euro Experience," The World Economy, Wiley Blackwell, vol. 33(7), pages 851-872, July.
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    More about this item

    Keywords

    currency union; optimal currency area; east Africa; business cycle synchronization;

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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