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Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence

Guglielmo Maria Caporale, Hector Carcel () and Luis Gil-Alana ()

No 7073, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper examines G-PPP and business cycle synchronization in the East Africa Community with the aim of assessing the prospects for a monetary union. The univariate fractional integration analysis shows that the individual series exhibit unit roots and are highly persistent. The fractional bivariate cointegration tests (see Marinucci and Robinson, 2001) suggest that there exist bivariate fractional cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and the Ugandan shilling. The FCVAR results (see Johansen and Nielsen, 2012) imply the existence of a single cointegrating relationship between the exchange rates of the EAC countries. On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree of business cycle synchronization between these economies. On both grounds, one can argue that a monetary union should be feasible.

Keywords: East Africa Community; monetary union; optimal currency areas; fractional integration and cointegration; business cycle synchronization; Hodrick-Prescott filter (search for similar items in EconPapers)
JEL-codes: C22 C32 F33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-mon
Date: 2018
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