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REER Imbalances and Macroeconomic Adjustments in the Proposed W est A frican Monetary Union
Author(s) -
Asongu Simplice
Publication year - 2014
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12039
Subject(s) - economics , monetary economics , cointegration , openness to experience , effective exchange rate , exchange rate , monetary policy , international economics , macroeconomics , econometrics , psychology , social psychology
Abstract With the spectre of the euro crisis hunting embryonic monetary unions, we use a dynamic model of a small open economy to analyse real effective exchange rate ( REER ) imbalances and examine whether the movements in the aggregate real exchange rates are consistent with the underlying macroeconomic fundamentals in the proposed W est A frican Monetary Union ( WAMU ). Using both country‐oriented and WAMU panel‐based specifications, we show that the long‐run behaviour of the REERs can be explained by fluctuations in the terms of trade, productivity, investment, debt and openness. While there is still significant evidence of cross‐country differences in the relationship between underlying macroeconomic fundamentals and corresponding REERs , the embryonic WAMU has a stable error correction mechanism, with four of the five cointegration relations having signs that are consistent with the predictions from economic theory. Policy implications are discussed, and the conclusions of the analysis are a valuable contribution to the scholarly and policy debate over whether the creation of a sustainable monetary union should precede convergence in macroeconomic fundamentals that determine REER adjustments.