Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks
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Dec 10, 2021
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Abstract
This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.
JEL classification: C12, C53, F15, E32, F45
Keywords: Monetary integration; Macroeconomic shocks; Impulse response function; Forecast error variance decomposition
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Ndongo, A. and Diop, I. (2021) “Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks”, World Journal of Applied Economics, 7(2), pp. 61-87. doi: 10.22440/wjae.7.2.3.
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Research Articles
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References
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Bernanke, B. S., & Gertler, M. (1986). Agency costs, collateral, and business fluctuations. National Bureau of Economic Research. doi:10.3386/w2015
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Boiciuc, I. (2015). The effects of fiscal policy shocks in Romania. A SVAR Approach. Procedia Economics and Finance, 32 , 1131–1139. doi:10.1016/S2212-5671(15)01578-6
Chamie, N., DeSerres, A., & Lalonde, R. (1994). Optimum currency areas and shock asymmetry: a comparison of Europe and the United States (Bank of Canada Working Paper No. 94/1).
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20 (2), 249–272. doi:10.1016/S0261-5606(00)00048-6
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Collard, F., & Feve, P. (2008). Modeles VAR ou DSGE: que choisir? Economie prevision(2), 153–174. doi:10.3917/ecop.183.0153
Debortoli, D., & Nunes, R. (2014). Monetary regime switches and central bank preferences. Journal of Money, Credit and Banking, 46 (8), 1591–1626. doi:10.1111/jmcb.12160
Debrun, X., Masson, P., & Pattillo, C. (2005). Monetary union in West Africa: who might gain, who might lose, and why? Canadian Journal of Economics/Revue canadienne d’economique, 38 (2), 454–481. doi:10.1111/j.0008-4085.2005.00288.x
Dumitrescu, E.-I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29 (4), 1450–1460. doi:10.1016/j.econmod.2012.02.014
Evans, C. L. (1992). Productivity shocks and real business cycles. Journal of Monetary Economics, 29 (2), 191–208. doi:10.1016/0304-3932(92)90012-Q
Friedman, M., & Schwartz, A. J. (1963). Front Matter. In A Monetary History of the United States, 1867-1960 (pp. i–vi). Princeton University Press. http://www.jstor.org/stable/j.ctt7s1vp.1.
Gonzalez-Rozada, M., & Fanelli, J. (2004). Business Cycles and Macroeconomic Policy Coordination in Mercosur (Econometric Society 2004 Latin American Meetings No. 328). Econometric Society. Retrieved from https://EconPapers.repec.org/RePEc:ecm:latm04:328
Granger, C., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2 (2), 111-120. doi:10.1016/0304-4076(74)90034-7
Granger, C. W. J. (1969). Investigating causal relations by econometric models and crossspectral methods. Econometrica, 424–438. doi:10.2307/1912791
Grossmann, A., Love, I., & Orlov, A. G. (2014). The dynamics of exchange rate volatility: A panel VAR approach. Journal of International Financial Markets, Institutions and Money, 33 , 1–27. doi:10.1016/j.intfin.2014.07.008
Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50 (4), 1029–1054. doi:10.2307/1912775
Harris, R. D. F., & Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics, 91 (2), 201–226. doi:10.1016/S0304-4076(98)00076-1
Holtz-Eakin, D., Newey, W., & Rosen, H. S. (1988). Estimating vector autoregressions with panel data. Econometrica, 1371–1395. doi:10.2307/1913103
Houssa, R. (2008). Monetary union in West Africa and asymmetric shocks: A dynamic structural factor model approach. Journal of Development Economics, 85 (1-2), 319–347. doi:10.1016/j.jdeveco.2006.05.003
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115 (1), 53–74. doi:10.1016/S0304-4076(03)00092-7
Kalemli-Ozcan, S., Sorensen, B., & Yosha, O. (2001). Regional integration, industrial specialization and the asymmetry of shocks across regions. Journal of International Economics, 55 (1), 107–137. doi:10.1016/S0022-1996(01)00097-6
Kydland, F. E., & Prescott, E. C. (1982). Time to build and aggregate fluctuations. Econometrica, 1345–1370. doi:10.2307/1913386
Levin, A., & Lin, C.-F. (1993). Unit root tests in panel data: new results (University of California at San Diego, Economics Working Paper Series).
Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108 (1), 1–24. doi:10.1016/S0304-4076(01)00098-7
Lof, M., & Malinen, T. (2014). Does sovereign debt weaken economic growth? A panel VAR analysis. Economics Letters, 122 (3), 403–407. doi:10.1016/j.econlet.2013.12.037
Lutkepohl, H. (2005). New introduction to multiple time series analysis. Springer Science & Business Media. doi:10.1007/978-3-540-27752-1
Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61 (S1), 631–652. doi:10.1111/1468-0084.0610s1631
Mati, S., Civcir, I., & Ozdeser, H. (2019). ECOWAS common currency: how prepared are its members? Investigaci´on econ´omica, 78 (308), 89–119. doi:10.2307/26632475
Mehrara, M., & Mohaghegh, M. (2011). Macroeconomic dynamics in the oil exporting countries: a panel VAR study. International Journal of Business and Social Science, 2 (21), 288–295.
Moon, H. R., & Perron, B. (2004). Testing for a unit root in panels with dynamic factors. Journal of Econometrics, 122 (1), 81–126. doi:10.1016/j.jeconom.2003.10.020
Mountford, A., & Uhlig, H. (2009). What are the effects of fiscal policy shocks? Journal of Applied Econometrics, 24 (6), 960–992. doi:10.1002/jae.1079
Nolan, C., Schaling, E., et al. (1996). Monetary policy uncertainty and central bank accountability. Bank of England London.
Nzimande, N. P., & Ngalawa, H. (2017). The endogeneity of business cycle synchronisation in SADC: A GMM approach. Cogent Economics & Finance, 5 (1), 1358914. doi:10.1080/23322039.2017.1358914
Olaoye, O. O., Eluwole, O. O., Ayesha, A., & Afolabi, O. O. (2020). Government spending and economic growth in ECOWAS: An asymmetric analysis. The Journal of Economic Asymmetries, 22 , e00180. doi:10.1016/j.jeca.2020.e00180
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61 (S1), 653–670. doi:10.1111/1468-0084.0610s1653
Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 1–38. doi:10.1007/s00181-020-01875-7
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22 (2), 265–312. doi:10.1002/jae.951
Ramde, F. (2015). Institution, investissements et croissance dans l’UEMOA: une approche panel VAR [Institution, investments and growth in WAEMU: a panel VAR approach] (MPRA Paper No. 82417). University Library of Munich, Germany. Retrieved from https://ideas.repec.org/p/pra/mprapa/82417.html
Robert Nobay, A., & Peel, D. A. (2003). Optimal discretionary monetary policy in a model of asymmetric central bank preferences. The Economic Journal, 113 (489), 657–665. doi:10.1111/1468-0297.t01-1-00149
Rogers, J. H. (1999). Monetary shocks and real exchange rates. Journal of International Economics, 49 (2), 269–288. doi:10.1016/S0022-1996(98)00057-9
Romer, C. D., & Romer, D. H. (2004). A new measure of monetary shocks: Derivation and implications. American Economic Review, 94 (4), 1055–1084. doi:10.1257/0002828042002651
Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 1–48. doi:10.2307/1912017
Tapsoba, S. (2009). Heterogeneite des chocs et viabilite des unions monetaires en Afrique de l’Ouest. Revue economique et monetaire n-juin, 5 , 38.
Tsangarides, C. G., & Qureshi, M. S. (2008). Monetary union membership in West Africa: A cluster analysis. World Development, 36 (7), 1261–1279. doi:doi.org/10.1016/j.worlddev.2007.06.019
Bai, J., & Ng, S. (2004). A Panic attack on unit roots and cointegration. Econometrica, 72 (4), 1127–1177. doi:10.1111/j.1468-0262.2004.00528.x
Beetsma, R., Giuliodori, M., & Klaassen, F. (2008). The effects of public spending shocks on trade balances and budget deficits in the European Union. Journal of the European Economic Association, 6 (2-3), 414–423. doi:10.1162/JEEA.2008.6.2-3.414
Bernanke, B. S., & Gertler, M. (1986). Agency costs, collateral, and business fluctuations. National Bureau of Economic Research. doi:10.3386/w2015
Blanchard, O., & Perotti, R. (2002). An empirical characterization of the dynamic effects of changes in government spending and taxes on output. The Quarterly Journal of Economics, 117 (4), 1329–1368. doi:10.1162/003355302320935043
Boiciuc, I. (2015). The effects of fiscal policy shocks in Romania. A SVAR Approach. Procedia Economics and Finance, 32 , 1131–1139. doi:10.1016/S2212-5671(15)01578-6
Chamie, N., DeSerres, A., & Lalonde, R. (1994). Optimum currency areas and shock asymmetry: a comparison of Europe and the United States (Bank of Canada Working Paper No. 94/1).
Choi, I. (2001). Unit root tests for panel data. Journal of International Money and Finance, 20 (2), 249–272. doi:10.1016/S0261-5606(00)00048-6
Christiano, L. J., Eichenbaum, M., & Evans, C. L. (1999). Chapter 2 Monetary policy shocks: What have we learned and to what end? In (Vol. 1, p. 65-148). Elsevier. doi:10.1016/S1574-0048(99)01005-8
Collard, F., & Feve, P. (2008). Modeles VAR ou DSGE: que choisir? Economie prevision(2), 153–174. doi:10.3917/ecop.183.0153
Debortoli, D., & Nunes, R. (2014). Monetary regime switches and central bank preferences. Journal of Money, Credit and Banking, 46 (8), 1591–1626. doi:10.1111/jmcb.12160
Debrun, X., Masson, P., & Pattillo, C. (2005). Monetary union in West Africa: who might gain, who might lose, and why? Canadian Journal of Economics/Revue canadienne d’economique, 38 (2), 454–481. doi:10.1111/j.0008-4085.2005.00288.x
Dumitrescu, E.-I., & Hurlin, C. (2012). Testing for Granger non-causality in heterogeneous panels. Economic Modelling, 29 (4), 1450–1460. doi:10.1016/j.econmod.2012.02.014
Evans, C. L. (1992). Productivity shocks and real business cycles. Journal of Monetary Economics, 29 (2), 191–208. doi:10.1016/0304-3932(92)90012-Q
Friedman, M., & Schwartz, A. J. (1963). Front Matter. In A Monetary History of the United States, 1867-1960 (pp. i–vi). Princeton University Press. http://www.jstor.org/stable/j.ctt7s1vp.1.
Gonzalez-Rozada, M., & Fanelli, J. (2004). Business Cycles and Macroeconomic Policy Coordination in Mercosur (Econometric Society 2004 Latin American Meetings No. 328). Econometric Society. Retrieved from https://EconPapers.repec.org/RePEc:ecm:latm04:328
Granger, C., & Newbold, P. (1974). Spurious regressions in econometrics. Journal of Econometrics, 2 (2), 111-120. doi:10.1016/0304-4076(74)90034-7
Granger, C. W. J. (1969). Investigating causal relations by econometric models and crossspectral methods. Econometrica, 424–438. doi:10.2307/1912791
Grossmann, A., Love, I., & Orlov, A. G. (2014). The dynamics of exchange rate volatility: A panel VAR approach. Journal of International Financial Markets, Institutions and Money, 33 , 1–27. doi:10.1016/j.intfin.2014.07.008
Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica, 50 (4), 1029–1054. doi:10.2307/1912775
Harris, R. D. F., & Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics, 91 (2), 201–226. doi:10.1016/S0304-4076(98)00076-1
Holtz-Eakin, D., Newey, W., & Rosen, H. S. (1988). Estimating vector autoregressions with panel data. Econometrica, 1371–1395. doi:10.2307/1913103
Houssa, R. (2008). Monetary union in West Africa and asymmetric shocks: A dynamic structural factor model approach. Journal of Development Economics, 85 (1-2), 319–347. doi:10.1016/j.jdeveco.2006.05.003
Im, K. S., Pesaran, M. H., & Shin, Y. (2003). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115 (1), 53–74. doi:10.1016/S0304-4076(03)00092-7
Kalemli-Ozcan, S., Sorensen, B., & Yosha, O. (2001). Regional integration, industrial specialization and the asymmetry of shocks across regions. Journal of International Economics, 55 (1), 107–137. doi:10.1016/S0022-1996(01)00097-6
Kydland, F. E., & Prescott, E. C. (1982). Time to build and aggregate fluctuations. Econometrica, 1345–1370. doi:10.2307/1913386
Levin, A., & Lin, C.-F. (1993). Unit root tests in panel data: new results (University of California at San Diego, Economics Working Paper Series).
Levin, A., Lin, C.-F., & Chu, C.-S. J. (2002). Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics, 108 (1), 1–24. doi:10.1016/S0304-4076(01)00098-7
Lof, M., & Malinen, T. (2014). Does sovereign debt weaken economic growth? A panel VAR analysis. Economics Letters, 122 (3), 403–407. doi:10.1016/j.econlet.2013.12.037
Lutkepohl, H. (2005). New introduction to multiple time series analysis. Springer Science & Business Media. doi:10.1007/978-3-540-27752-1
Maddala, G. S., & Wu, S. (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics, 61 (S1), 631–652. doi:10.1111/1468-0084.0610s1631
Mati, S., Civcir, I., & Ozdeser, H. (2019). ECOWAS common currency: how prepared are its members? Investigaci´on econ´omica, 78 (308), 89–119. doi:10.2307/26632475
Mehrara, M., & Mohaghegh, M. (2011). Macroeconomic dynamics in the oil exporting countries: a panel VAR study. International Journal of Business and Social Science, 2 (21), 288–295.
Moon, H. R., & Perron, B. (2004). Testing for a unit root in panels with dynamic factors. Journal of Econometrics, 122 (1), 81–126. doi:10.1016/j.jeconom.2003.10.020
Mountford, A., & Uhlig, H. (2009). What are the effects of fiscal policy shocks? Journal of Applied Econometrics, 24 (6), 960–992. doi:10.1002/jae.1079
Nolan, C., Schaling, E., et al. (1996). Monetary policy uncertainty and central bank accountability. Bank of England London.
Nzimande, N. P., & Ngalawa, H. (2017). The endogeneity of business cycle synchronisation in SADC: A GMM approach. Cogent Economics & Finance, 5 (1), 1358914. doi:10.1080/23322039.2017.1358914
Olaoye, O. O., Eluwole, O. O., Ayesha, A., & Afolabi, O. O. (2020). Government spending and economic growth in ECOWAS: An asymmetric analysis. The Journal of Economic Asymmetries, 22 , e00180. doi:10.1016/j.jeca.2020.e00180
Pedroni, P. (1999). Critical values for cointegration tests in heterogeneous panels with multiple regressors. Oxford Bulletin of Economics and Statistics, 61 (S1), 653–670. doi:10.1111/1468-0084.0610s1653
Pesaran, M. H. (2004). General diagnostic tests for cross-sectional dependence in panels. Empirical Economics, 1–38. doi:10.1007/s00181-020-01875-7
Pesaran, M. H. (2007). A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics, 22 (2), 265–312. doi:10.1002/jae.951
Ramde, F. (2015). Institution, investissements et croissance dans l’UEMOA: une approche panel VAR [Institution, investments and growth in WAEMU: a panel VAR approach] (MPRA Paper No. 82417). University Library of Munich, Germany. Retrieved from https://ideas.repec.org/p/pra/mprapa/82417.html
Robert Nobay, A., & Peel, D. A. (2003). Optimal discretionary monetary policy in a model of asymmetric central bank preferences. The Economic Journal, 113 (489), 657–665. doi:10.1111/1468-0297.t01-1-00149
Rogers, J. H. (1999). Monetary shocks and real exchange rates. Journal of International Economics, 49 (2), 269–288. doi:10.1016/S0022-1996(98)00057-9
Romer, C. D., & Romer, D. H. (2004). A new measure of monetary shocks: Derivation and implications. American Economic Review, 94 (4), 1055–1084. doi:10.1257/0002828042002651
Sims, C. A. (1980). Macroeconomics and reality. Econometrica, 1–48. doi:10.2307/1912017
Tapsoba, S. (2009). Heterogeneite des chocs et viabilite des unions monetaires en Afrique de l’Ouest. Revue economique et monetaire n-juin, 5 , 38.
Tsangarides, C. G., & Qureshi, M. S. (2008). Monetary union membership in West Africa: A cluster analysis. World Development, 36 (7), 1261–1279. doi:doi.org/10.1016/j.worlddev.2007.06.019