Does Economic Policy Coordination Improve Business Cycles Synchronization in WAEMU states?

Abstract

Business cycle synchronization is a prerequisite for an optimal economic and monetary union. It may be improved by many factors, among them the economic policy similarities. This study examines the long run impact of economic policy coordination on business cycles synchronization (BCS) of seven West African Economic and Monetary Union (WAEMU) states over the 1995–2018 period. We approximate and measure economic policy coordination through the quasi-correlation coefficient of the inflation rate, budgetary balance and public debt, whereas business cycles synchronization is measured via the quasi-correlation coefficient of real GDP’s cyclical components. After testing for cross-section dependence, unit root and cointegration, we employ the Dynamic Common Correlated Effects (DCCE) method to fit our specified Cross-Sectionally augmented Auto-Regressive Distributed Lags (CS-ARDL) model. Our findings reveal that inflation rate coordination strengthens business cycles synchronization, while budgetary balance coordination lessens the latter. Moreover, robustness check results from Cross-Sectionally Distributed Lags (CS-DL) model indicate that inflation rate coordination positively affects BCS whereas budgetary balance coordination has a negative effect on the latter, supporting our baseline results. However, we find that public debt coordination impacts on BCS remain null in all models. The paper recommends that WAEMU states rethink the convergence criteria related to the budgetary balance and public debt in order to make stronger their business cycles synchronization.