Business Cycle Synchronization in the Proposed East African Monetary Union: An Unobserved Component Approach

12 Pages Posted: 25 Oct 2011

See all articles by N. Kundan Kishor

N. Kundan Kishor

University of Wisconsin - Milwaukee

John Ssozi

Baylor University

Date Written: November 2011

Abstract

This paper uses the business cycle synchronization criteria of the theory of optimum currency area (OCA) to examine the feasibility of the East African Community (EAC) as a monetary union. We also investigate whether the degree of business cycle synchronization has increased after the 1999 EAC Treaty. We use an unobserved component model to measure business cycle synchronization as the proportion of structural shocks that are common across different countries, and a time‐varying parameter model to examine the dynamics of synchronization over time. We find that although the degree of synchronization has increased since 2000 when the EAC Treaty came into force, the proportion of shocks that is common across different countries is still small implying weak synchronization. This evidence casts doubt on the feasibility of a monetary union for the EAC as scheduled by 2012.

Suggested Citation

Kishor, N. Kundan and Ssozi, John, Business Cycle Synchronization in the Proposed East African Monetary Union: An Unobserved Component Approach (November 2011). Review of Development Economics, Vol. 15, Issue 4, pp. 664-675, 2011, Available at SSRN: https://ssrn.com/abstract=1948933 or http://dx.doi.org/10.1111/j.1467-9361.2011.00634.x

N. Kundan Kishor (Contact Author)

University of Wisconsin - Milwaukee ( email )

Bolton Hall 802
3210 N. Maryland Ave.
Milwaukee, WI 53211
United States

John Ssozi

Baylor University ( email )

Waco, TX 76798
United States

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