ECONOMIC INTEGRATION AND EXCHANGE RATE DYNAMICS IN THE WEST AFRICAN MONETARY ZONE

George Tweneboah
University of Witwatersrand

Daniel Agyapong
University of Cape Coast

Siaw Frimpong
University of Cape Coast

 

ABSTRACT

We revisit the validity of long-run purchasing power parity in the West African Monetary Zone for quarterly data spanning from 1960 up to 2014. By allowing for unknown endogenous structural breaks in the data, the evidence indicates the existence of cointegration between nominal exchange rates and prices in all the countries. The results support that the PPP holds and can serve as a benchmark for exchange rate modeling in the sub-region. However, the diverse speeds of adjustment towards the equilibrium relationship suggests to exchange rate policymakers to take into account individual economic, social and political circumstances of the countries. We discuss the implications of these findings to guide policy choices in the monetary zone.