Inflation convergence and currency unions: the case of the East African community

N Kishor and John Ssozi

Indian Growth and Development Review, 2010, vol. 3, issue 1, 36-52

Abstract: Purpose - The purpose of this paper is to investigate inflation convergence within the East African Community (EAC) as it aspires to become a currency union. Design/methodology/approach - An unobserved dynamic factor model was used to decompose the variation in inflation into a component that is common across the countries in the EAC region and a component that is country specific. Convergence was measured by the percentage of variation in inflation that is common across countries. Findings - The estimated results from the dynamic factor model for the pre‐EAC Treaty (1981:3 to 2000:2) period and post‐EAC Treaty (2000:3 to 2009:1) period suggest that the percentage variation in inflation in the EAC that is explained by the common regional component increased significantly during the post‐Treaty period. Research limitations/implications - One of the limitations of this paper is that it does not address the mechanism through which the convergence in a currency union is achieved. Future research should try to examine the link between convergence and different macroeconomic policies. Practical implications - This paper suggests that the push towards forming a currency union in East Africa has led to a greater degree of inflation synchronization across different countries in the region. Originality/value - The main contribution of this paper is to use an unobserved component model to estimate the degree of inflation synchronization in East African countries.

Keywords: Monetary policy; Central and East Africa; Inflation; Currencies (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:igdrpp:v:3:y:2010:i:1:p:36-52

DOI: 10.1108/17538251011035864

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