Relationship between Macroeconomic Fundamentals in the West African Monetary Zone

We explore the level of convergence of interest rates, inflation rates, and exchange rates in the West African Monetary Zone economies. The study employs ARFIMA-FIGARCH models on data from January 2000 to December 2018. Two different models are estimated: one to analyze the mean reversion of the macroeconomic variables following country-specific shocks, and another to assess the conditional volatility of these shocks. The findings highlight dissimilarities in the level of integration of interest rates, inflation rates, and exchange rates across the countries. When there is a shock in any of the macroeconomic fundamentals, its reversion to the mean and conditional volatility exhibit mixed patterns. These results suggest that achieving ex-ante convergence for the implementation of a single currency in the West African Monetary Zone would be a difficult and challenging task. The study recommends that the heads of states of the West African Monetary Zone consider implementing surveillance mechanism to monitor these macroeconomic variables since these variables behave differently in the event of shock.