Open AccessEconomic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks
Author(s) -
Asta Ndongo,
Ibrahima Thione Diop
Publication year - 2021
Publication title -
world journal of applied economics
Language(s) - English
Resource type - Journals
ISSN - 2459-0126
DOI - 10.22440/wjae.7.2.3
Subject(s) - economics , exchange rate , variance decomposition of forecast errors , monetary policy , monetary economics , economic and monetary union , vector autoregression , fiscal policy , shock (circulatory) , inflation (cosmology) , depreciation (economics) , macroeconomics , international economics , european union , econometrics , medicine , physics , capital formation , financial capital , theoretical physics , economic growth , human capital
This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.