Exchange rates convergence in ECOWAS: WAMZ and WAEMU analysis on frequency time domains

Abstract

This study explores the interdependence of exchange rates between the West African Monetary Zone and the West African Economic and Monetary Union countries using monthly data from 2000 to 2021. Employing wavelet multiple correlation and wavelet multiple cross-correlation by Fernando-Macho, we generally uncovered low degrees of integration between the two blocs at higher frequencies, but the level of integration gradually becomes stronger as it navigates from higher a frequency (lower scale) to a lower frequency (higher scale). This implies that ex-ante convergence of exchange rates is difficult; however, in the long time horizon, exchange rate convergence is possible. Evidence from cross-correlation analysis shows that lead (lag) effects is time-varying and heterogeneous, showing no particular country’s exchange rates as leaders or followers. Different currencies have the potential to lead or lag on varying scales. These results suggest that member states establish a regional surveillance mechanism that can monitor macroeconomic indicators in the region. The effective implementation of this mechanism can aid in identifying macroeconomic imbalances and potential risks to macroeconomic stability and convergence.Exchange rate comovement is important for guaranteeing the introduction of a single currency. This is not different from the Economic Community of West African States (ECOWAS). The region seeks to accomplish this by developing robust and sound policies that ensure the synchronization of exchange rates. This study examines the comovements of exchange rates between WAMZ and the WAEMU countries. The results show that the ex-ante convergence of exchange rates is difficult for the region; however, in the long time horizon, exchange rate convergence is possible. Evidence from cross-correlation analysis shows that lead (lag) effects is time-varying and heterogeneous, showing no particular country’s exchange rate as leader or follower. The study recommends that the heads of states of ECOWAS consider the introduction of the ‘eco’ ex-post because exchange rates can converge in the long run.