Exchange Rate Scenarios, Export Dynamics, and GDP Responses: A Counterfactual Panel Structural VAR Analysis for WAMZ Countries
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Abstract
Regional monetary integration is seen as a way to enhance trade and growth. This study examines the dynamic interactions among exchange rate unification, exports, and economic growth in West African Monetary Zone (WAMZ) countries using a Panel Structural Vector Auto regression (PSVAR) framework. The model captures both temporal and cross-country dynamics, tolerating the identification of structural shocks and their transmission mechanisms. Three scenarios are considered: a baseline flexible exchange rate regime, an appreciation unification, and a depreciation unification. The baseline flexible regime provided the most stable macroeconomic balance, a sustainable growth path, and minimum welfare losses. The appreciation scenario led to export contraction and income volatility, while the depreciation scenario improved long-run competitiveness but caused short-term instability. The stability test confirmed the model’s dynamic soundness, as shocks dissipated over time. The findings suggest that flexible exchange rate management supported by credible macroeconomic policies enhances export competitiveness, sustains GDP growth, and promotes long-term stability in the WAMZ region.
JEL Classification: C33, E32,F31,F41
Keywords: Exchange rate unification; Exports; GDP growth; Panel Structural VAR; WAMZ; Exchange rate shocks; Counterfactual analysis
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Umeokwobi, R. (2025) “Exchange Rate Scenarios, Export Dynamics, and GDP Responses: A Counterfactual Panel Structural VAR Analysis for WAMZ Countries”, World Journal of Applied Economics, 11(2), pp. 79-93. doi: 10.22440/wjae.11.2.2.
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Research Articles
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References
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Pedroni, P. (2013). Structural Panel VARs. Econometrics, 1 (2), 180–206. doi:10.3390/econometrics1020180
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Raji, R. (2013). Impact of exchange rate on selected macroeconomic variables: A case study of West African Monetary Zone. Journal of Global Economy, 9 (1), 3-21. doi:10.1956/jge.v9i1.286
Zeileis, A. (2005). A Unified Approach to Structural Change Tests Based on ML Scores, F Statistics, and OLS Residuals. Econometric Reviews, 24 , 445–466. doi:10.1080/07474930500406053
Agenor, P. R., & Flood, R. P. (1992). Unification of Foreign Exchange Markets. Staff Papers (International Monetary Fund), 39 (4), 923–947. doi:10.2307/3867426
Akinbobola, T. O., & Akinlo, A. E. (2005). Should the West African countries form a currency union? South African Journal of Economic and Management Sciences, 8 (3), 326-338. doi:10.4102/sajems.v8i3.1199
Annang, E. (2018). The potentials and impediments of regional financial or regional monetary co-operation: A case study on West Africa (Working Paper,). SSRN. doi:10.2139/ssrn.3647165
Canova, F., & Ciccarelli, M. (2013). Panel Vector Autoregressive Models: A Survey. In N. Hashimzade & M. Thornton (Eds.), Handbook of Research Methods and Applications in Empirical Macroeconomics (p. 205–246). Cheltenham, UK: Edward Elgar Publishing. doi:10.4337/9780857931023.00015
Corm, G. (2006). The Arab experience (Working Paper, No. 1932). Naciones Unidas Comision Economica para America Latina y el Caribe (CEPAL). https://ideas.repec.org/b/ecr/col014/1932.html.
Debrun, X., Masson, P., & Pattillo, C. (2003). West African currency unions: Rationale and sustainability. CESifo Economic Studies, 49 (3), 381–413. doi:10.1093/cesifo/49.3.381
De la Torre, A., & Ize, A. (2014). Exchange rate unification: The Cuban case (Tech. Rep.). Brookings Institution and University of Havana, Center for the Study of the Cuban Economy. https://www.brookings.edu/articles/exchange-rate-unification-the-cuban-case/.
Famoroti, J. O., & Adeleke, O. (2022). Impact of monetary policy transmission mechanism in West African countries. Studia Universitatis Vasile Goldis Arad-Economics Series, 32 (1), 20-42. doi:10.2478/sues-2022-0002
Greenaway, D., & Sapsford, D. (1994). Exports, growth, and liberalization: An evaluation. Journal of Policy Modeling, 16 (2), 165-186. doi:10.1016/0161-8938(94)90019-1
Harvey, S. K., & Cushing, M. J. (2015). Is West African Monetary Zone (WAMZ) a common currency area? Review of Development Finance, 5 (1), 1-17. doi:10.1016/j.rdf.2015.05.001
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
Huang, G., & Wong, C. Y.-P. (1996). Unification of China’s foreign exchange rates. Contemporary Economic Policy, 14 (4), 32-45. doi:10.1111/j.1465-7287.1996.tb00632.x
Kiguel, M., & Lizondo, J. S. (2010). Adoption and abandonment of dual exchange rate systems. Economic Analysis Review, 5 (1), 3-23. https://www.rae-ear.org/index.php/rae/article/view/248.
Kusuma, D., Ashif, S. M. A., Harahap, A. M., & Omarsyah, M. A. (2013). The role of ASEAN exchange rate unit (AERU) for ASEAN-5 monetary integration: An optimum currency area criteria. Bulletin of Monetary Economics and Banking, 15 (3), 59-84. doi:10.21098/bemp.v15i3.68
Magee, S. P. (1973). Currency contracts, pass-through, and devaluation. Brookings Papers on Economic Activity, 4 (1), 303-325. https://www.brookings.edu/wp-content/uploads/1973/01/1973a_bpea_magee.pdf.
Manneh, P. A. A. (2008). The welfare effects of monetary union and flexible exchange rate regimes: The case for the West African Monetary Zone (WAMZ) and the West Africa Economic and Monetary Union (UEMOA) and the implications for the Gambia. International NGO Journal, 3 (11), 177–203. doi:10.5897/INGOJ.9000153
McKinnon, R. I. (1963). Optimum Currency Areas. American Economic Review, 53 (4), 717-725.
Mundell, R. A. (1961). A Theory of Optimum Currency Areas. American Economic Review, 51 (4), 657-665.
Ndongo, A., & Diop, I. T. (2021). Economic and monetary integration in ECOWAS countries: A panel VAR approach to identify macroeconomic shocks. World Journal of Applied Economics, 7 (2), 61-87. doi:10.22440/wjae.7.2.3
Ogunkola, O. (2005). An evaluation of the viability of a single monetary zone in ECOWAS (Research Paper, No. 147). African Economic Research Consortium (AERC). https://aercafrica.org/old-website/wp-content/uploads/2018/07/RP_147.pdf.
Okafor, H. O. (2013). Estimating the Costs and Benefits of a Common Currency for the Second West African Monetary Zone (WAMZ). Journal of Economics and Behavioral Studies, 5 (2), 57-68. https://files.core.ac.uk/download/pdf/288022652.pdf.
Omotor, D., & Niringiye, A. (2011). Optimum currency area and shock asymmetry: A dynamic analysis of the West African Monetary Zone (WAMZ). Romanian Journal of Economic Forecasting, 14 (3), 71-82. https://ipe.ro/rjef/rjef3_11/rjef3_2011p71-82.pdf.
Oyadeyi, O. (2024). Monetary integration across West Africa: Is the region ripe for a monetary union? SAGE Open, 14 (2). doi:10.1177/21582440241242958
Patterson, S. (2001). Exchange Rate Unification and the Persistence of the Parallel Market: the Ethiopia case. African Review of Money Finance and Banking, 37-50. http://www.jstor.org/stable/23026349.
Pedroni, P. (2013). Structural Panel VARs. Econometrics, 1 (2), 180–206. doi:10.3390/econometrics1020180
Rahman, Y. A., Osei-Fosu, A. K., & Sakyi, D. (2024). Correlations of structural shocks, dynamic responses of output and inflation to commodities price shocks and monetary union in WAMZ. African Journal of Economic and Management Studies, 15 (3), 419–439. doi:10.1108/AJEMS-04-2023-0129
Raji, R. (2013). Impact of exchange rate on selected macroeconomic variables: A case study of West African Monetary Zone. Journal of Global Economy, 9 (1), 3-21. doi:10.1956/jge.v9i1.286
Zeileis, A. (2005). A Unified Approach to Structural Change Tests Based on ML Scores, F Statistics, and OLS Residuals. Econometric Reviews, 24 , 445–466. doi:10.1080/07474930500406053