Should African Monetary Unions Be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa

Xavier Debrun, Paul Masson and Catherine Pattillo

Chapter 6 in Macroeconomic Modelling and Monetary and Exchange Rate Regimes, 2019, pp 195-242 from World Scientific Publishing Co. Pte. Ltd.

Abstract: This paper develops a cost–benefit analysis of monetary integration and applies it to the currency unions being actively pursued in Africa. While many related studies have highlighted the problems associated with shock asymmetries, very few analyses have attempted to weigh these against potential benefits. In our model, the benefits of monetary union come from a more credible monetary policy and a correspondingly lower inflationary bias, while the costs derive from both output shock asymmetries (which are identified with different terms of trade movements) and fiscal disparities. Using African data, we estimate key equilibrium relationships of the model. These capture quite well the cross-country variation in inflation and fiscal revenues, allowing us to calibrate the full model. The model simulations indicate that the proposed East African Community, Economic Community of West African States and Southern Africa Development Community monetary unions bring about net benefits to some potential members, but that many other prospective members record relatively modest net gains and sometimes net losses. The paper also discusses how strengthening domestic monetary and fiscal institutions is an alternative that can provide some of the same benefits of monetary unions and therefore reduce their relative attractiveness.

Keywords: Exchange Rates; Modelling; Monetary Unions; Inflation Targeting (search for similar items in EconPapers)
JEL-codes: F45 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Should African Monetary Unions Be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa (2010)
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