Monetary Integration Across West Africa: Is the Region Ripe for a Monetary Union?

Abstract

This study investigates the possibility of forming a monetary union across West Africa. This was achieved by employing the structural VAR framework. Data on real GDP, inflation, and exchange rate were used to represent supply, monetary, and demand shocks from the period 1986 to 2020. The impulse response and variance decomposition results showed that shocks affecting the West African region are idiosyncratic, while the residuals of the structural VAR were used to compute the correlation coefficient. The correlation coefficient revealed that the demand and monetary shocks were symmetric across WAEMU countries and asymmetric for the rest of the region. The study suggests that the West African region is not ripe for a monetary union. However, the study opined that the WAEMU countries are the closest to forming a West African monetary union and a piecemeal approach may be adopted such that the WAEMU countries are the first to form the union, while the rest may join when they meet the convergence criteria. In essence, West African countries’ central banks need to focus on harmonizing their monetary policies and remove all barriers to factor mobility for the synchronization of shocks and for all countries to meet the convergence criteria.