Empirical Assessment of Exchange Market Pressure within the West African Monetary Zone

The focus of this paper is the identification of currency risks periods (or otherwise) in the WAMZ and to further test the response of exchange market pressure (EMP) to monetary policy related factors in these countries as well as movements in primary commodity prices, given the feature of these countries as primary commodity exporting countries. The first phase of the EMP analysis in this work employed the model-independent statistical method of Eichengreen, Rose and Wyplosz (1996) to derive EMP indices in determining currency crisis susceptibility of the countries under study. The second part assessed the response of EMP to monetary policy across the WAMZ as well as evaluate the similarities in the patterns and strengths of the response of EMP towards checking for compatibility across the WAMZ countries. In this respect, the Girton and Roper (1977) model of exchange market pressure was applied in the model-dependent estimations for the six countries under study. The evaluation of exchange market pressure in the WAMZ employed the use of both annual and monthly data of the WAMZ countries under assessment as well as the CPI inflation data of the US. These data spanning between 2001 and 2015. EMP index were constructed for each of the WAMZ member countries within the contexts of the US dollar and the Nigeria naira foreign exchange markets in the WAMZ. For the model dependent EMP, robust regression method was applied in the estimation. Evidences gathered revealed mixed forms of the absorption of market pressure in the WAMZ, with the majority of the member countries of the WAMZ (including the lead economy) absorbing exchange market pressure through domestic currency depreciation relative to reserves depletion. From the results of the assessments with both annual and quarterly data it cannot be confidently inferred that a common exchange rate and a single foreign exchange market is feasible for the WAMZ countries in the proposed single currency area. The adoption of a single exchange rate in a common foreign exchange market should therefore be considered with caution. The foreign exchange market is likely to be free from future currency crisis. Because of the possible and expected massive influence of Nigeria in the foreign exchange market, foreign inflation may not hugely impact the proposed exchange rate and the external value of the proposed single currency.