Alternative reconsideration of output growth differrential for the West African Monetary Zone

Abstract

This paper examines the determinants of output growth differentials from set convergence criteria in a panel of West African Monetary Zone (WAMZ) states. Drawing largely from micro-founded models, rooted in New Keynesian traditions, the study shows that widespread divergence of output growth rates of participating countries from ideal benchmarks calls to question the ability of independent monetary and exchange rates policy as instruments of national/regional macroeconomic stabilization, the preconditions for unionization. Using a stylized 5-country model of WAMZ area, the differences in national output growth/demand is analyzed in the light of country specific shocks or differences in the monetary transmission mechanisms. The main results show that business cycles (output shocks) stabilization around a desired target was not attained. Over the sample period, the un-weighted average regional GDP growth rates were very slow, vary widely among the countries and responded very poorly to independent monetary policy stance. The strong output growth rates divergence among these countries suggest a reconsideration of output convergence as pre-condition for unionization.Growth rates differentials; Output convergence; exchange rate; WAMZ members; and panel data