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Endogenous optimal currency areas: The case of the Central African Economic and Monetary Community

The Central African Economic and Monetary Community (CAEMC) has been a monetary union for several decades now. According to the hypothesis of endogenous optimal currency areas (OCA), the degree of business cycles synchronization across its member states should be significantly higher today than 40 years ago. Investigating the empirical validity of this hypothesis is important in the context of the African economic integration process. If currency unions are endogenous, then quick monetary integration is a worthwhile option that can be used to accelerate economic integration. On the contrary, if currency unions were not endogenous, then a speedy monetary unification would not benefit countries collectively and might therefore jeopardize the whole regional integration initiative. This paper assesses the endogeneity of CAEMC as an OCA by examining the cross-country synchronization of business cycles along three statistical dimensions: bilateral correlation of cyclical co-movements, similarity of cycle statistical properties, and concordance of cyclical phases. Its innovative contribution is threefold. First, it provides a direct test of the endogeneity hypothesis on a specific currency union. Most previous studies instead rely on panel estimates of global datasets. Second, it expands the existing literature on the monetary geography of Africa. Indeed, there are several papers that study whether or not specific African regions are OCA. However, these papers generally look at the ex-ante conditions for optimality, leaving the issue of endogeneity of OCA criteria unexplored. The paper fills in this gap. Third, the paper presents a business cycle chronology for the six CAEMC members, thus opening up new opportunities to understand the cyclical characterization of economic systems and policies in the region. The main result of the analysis is that (i) the degree of synchronization of business cycles across CAEMC countries has remained low throughout the period 1960-2007, but (ii) it has somewhat increased over time. This increase is however marginal in both economic and statistical terms, thus implying that CAEMC currency union is not as endogenous as one would expect from previous empirical results obtained from global datasets. The reason why the endogeneity effect is so weak is that its channels of transmission are not work: intra-regional trade is very low and macroeconomic policies across union members do not seem to converge. Furthermore, increasingly different productive structures also reduced the intensity of synchronization. The policy implications of the analysis then concern the design of policy and institutions in the CAEMC and the way forward for monetary unification in Africa.

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File URL: http://www.uq.edu.au/economics/abstract/390.pdf
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Paper provided by School of Economics, University of Queensland, Australia in its series Discussion Papers Series with number 390.

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Date of creation: 2009
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Handle: RePEc:qld:uq2004:390
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  1. Harding, Don & Pagan, Adrian, 2001. "Extracting, Using and Analysing Cyclical Information," MPRA Paper 15, University Library of Munich, Germany.
  2. Michael Artis & Massimiliano Marcellino & Tommaso Proietti, 2004. "Characterising the Business Cycle for Accession Countries," Working Papers 261, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Marianne Baxter & Michael A. Kouparitsas, 2004. "Determinants of Business Cycle Comovement: A Robust Analysis," NBER Working Papers 10725, National Bureau of Economic Research, Inc.
  4. Zsolt Darvas & György Szapáry, 2006. "Business Cycle Synchronization in the Enlarged EU," Working Papers 0604, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
  5. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
  6. Khamfula, Yohane & Huizinga, Harry, 2004. "The Southern African Development Community: suitable for a monetary union?," Journal of Development Economics, Elsevier, vol. 73(2), pages 699-714, April.
  7. Artis, Michael J & Marcellino, Massimiliano & Proietti, Tommaso, 2003. "Dating the Euro Area Business Cycle," CEPR Discussion Papers 3696, C.E.P.R. Discussion Papers.
  8. Romain Houssa, 2004. "Monetary Union in West Africa and Asymmetric Shocks: A Dynamic Structural Factor Model Approach," Development and Comp Systems 0409063, EconWPA.
  9. Fabrizio Carmignani, 2006. "The Road to Regional Integration in Africa: Macroeconomic Convergence and Performance in COMESA," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 15(2), pages 212-250, June.
  10. David Fielding & Kevin Lee & Kalvinder Shields, 2004. "The Characteristics of Macroeconomic Shocks in the CFA Franc Zone," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 13(4), pages 488-517, December.
  11. Terence D.Agbeyegbe, 2003. "On the feasibility of a monetary union in the Southern Africa Development Community," Economics Working Paper Archive at Hunter College 306, Hunter College Department of Economics, revised 2003.
  12. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, 07.
  13. Georgios Karras, 2007. "Is Africa an Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 16(2), pages 234-258, March.
  14. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers.
  15. Proietti, Tommaso, 2005. "New algorithms for dating the business cycle," Computational Statistics & Data Analysis, Elsevier, vol. 49(2), pages 477-498, April.
  16. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  17. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-Validating Optimum Currency Areas," NBER Working Papers 8783, National Bureau of Economic Research, Inc.
  18. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  19. Belke, Ansgar, 2007. "Endogenous Optimum Currency Areas and the Blend of Sectors – On the Determinants of Business Cycle Correlation across European Regions," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 22, pages 26-49.
  20. repec:ebl:ecbull:v:6:y:2008:i:12:p:1-10 is not listed on IDEAS
  21. S. Jules-Armand Tapsoba, 2009. "Trade Intensity and Business Cycle Synchronicity in Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 18(2), pages 287-318, March.
  22. Harding, Don & Pagan, Adrian, 2006. "Synchronization of cycles," Journal of Econometrics, Elsevier, vol. 132(1), pages 59-79, May.
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