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Investigating the Benefits of a Currency Union to Trade: A Case Study on WAMZ Countries

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  • Cham, Tamsir

    (The Islamic Research and Teaching Institute (IRTI))

Abstract

This paper assesses the benefits of a currency union by using the West African Monetary Zone (WAMZ) and the traditional gravity model approach. This is the first investigative study on WAMZ’s impact on trade using a modified gravity model approach that incorporates the instability index, which characterizes the zone. This approach is useful in checking the impact of a single currency on trade enhancement and the impact of the instability index on economic growth. Using an Ordinary Least Squares (OLS) with different specifications of the gravity model and panel data set consisting of bilateral trade observations on 9 countries from 1980-2014, the empirical findings supported the hypothesis that currency unions do have a significant positive impact on trade flows. The results indicated that impact of the currency union on trade in the West African countries considered exceeds 20 percent. It therefore suffices to state that a currency union leads to trade enhancement.

Suggested Citation

  • Cham, Tamsir, 2016. "Investigating the Benefits of a Currency Union to Trade: A Case Study on WAMZ Countries," Policy Papers 2016-2, The Islamic Research and Teaching Institute (IRTI).
    • Handle: RePEc:ris:irtipp:2016_002
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    References listed on IDEAS

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    More about this item

    Keywords

    Currency Union; Gravity Model; Trade;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F15 - International Economics - - Trade - - - Economic Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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