The impact of trade integration on the business cycles synchronization in West African Countries: Implications for the AfCFTA

Abstract

• Trade integration is significant in business cycle synchronization in West Africa. • Overall trade intensity and demand spillovers matter more for cycle co-movements. • Fiscal, monetary, and exchange-rate policies are important for synchronization. • The AfCFTA’s increase in trade will have a stronger impact on monetary integration. • If accompanied by deeper macroeconomic policy coordination within ECOWAS. This article analyzes the link between business cycles synchronization and trade integration using panel data for 15 West African countries from 2000 to 2020. Business cycles synchronization is a key requirement from the standpoint of establishing a common currency by 2027. We add to the body of literature by considering intra-industry trade and accounting for the effect of fiscal, monetary and exchange rate policies. Our results suggest that trade intensity is positively related to the synchronization of business cycles in West Africa. However, intra-industry trade is not the major factor explaining the co-movements of the business cycles. Indeed, our findings indicate that the enhancement of fiscal, monetary, and exchange rate coordination fosters the synchronization of business cycles. The study’s results have relevant policy implications for the proposed formation of a West African currency union.