Policy adjustment, convegence and monetary integration in a common monetary area

Abstract

The study analysed the readiness of the Common Monetary Area (CMA) in moving towards a monetary union with intention being to provide preliminary indication as to whether they should continue to pursue the agenda or not. The aim of the study was achieved by evaluating the extent of convergence in the CMA in terms of the macroeconomic variables and assessing whether the CMA can constitute an optimum currency area. Macroeconomic convergence is critical for the CMA as they to look to make a move to another level of integration. There are various measures used to assess the possibility of the monetary union by evaluating the extent of convergence in the CMA and whether it can constitute optimum currency area. Descriptive statistic such a mean and standard deviation were of use to measure the extent of the convergence among the macroeconomic variables (inflation, budget deficit, government debt, foreign reserves, and GDP growth Trade openness (trade as percentage of GDP) and business cycle were utilized to evaluate the whether the CMA can constitute optimum currency or not. The empirical results proved that convergence exist among macroeconomic variables. This is an indication that it would probably be advantageous for member countries to move to another greater level of integration, which will lead into faster growth due to the process of convergence, as well as the capacity to receive new technologies developed in the leading nations. The estimated ARDL model results also reveal that there exists monetary convergence in the CMA. The outcome is proven by the co-movement of inflation and interest rate. To assess the viability of CMA forming an optimum currency area, the study relied upon the theoretical lenses of the OCA theory. This theory shows that the relations within the CMA satisfy the basic conditions required to shape an optimal currency area. The results reflect a certain level of disparity among CMA member states, implying that there is possibility of facing asymmetric shocks for the participating countries. However, such a situation does not imply that the CMA cannot form a monetary union; rather it means that alteration mechanism should be in position to be utilized as shock absorbers in cases where they encounter different shocks. This implies that there are more positive steps that need to be taken if the CMA is to thrive economically. The overall conclusion based on the empirical results is that the CMA is good phase to move toward a full-fledged monetary union and at a lesser cost. However, the disparity of the economic structures in the CMA means that in their move for a full monetary integration they must be patient and cautious as they work toward it