Macroeconomic costs and benefits of a common currency for the second West African Monetary Zone (WAMZ)

Abstract

Against the background and mixed results on the implications of adopting a common monetary policy framework, this study examined the macroeconomic costs and benefits of a common currency for the second West African Monetary Zone (WAMZ). Macroeconometric models based on a hybrid theoretical framework of the Optimum Currency Area and the Endogenous Optimum Currency Area theories were developed to estimate the elements of costs and benefits of monetary union. It revealed that the costs due to loss of monetary policy autonomy and fiscal policy distortion were significantly higher than the expected trade creation and policy coordination gains. To benefit from economic and monetary integration, the region needed to deal with the sources of fiscal policy distortion through better management of their economies.

Keywords: Behavioural models, Monetary policy autonomy, Fiscal policy distortion and Asymmetric shocks.

JEL Classification: E60, E61, E63, F41 and F42