An Evaluation Of Alternative Options To Macroeconomic Convergence Criteria And Policy For The West African Monetary Zone

ABSTRACT

The commencement of WAMZ initially scheduled for 2003, was postponed to 2005 and finally for the third time to 2009, due to the tendency of the adopted macroeconomic convergence criteria to lead to indeterminacy. This has become a burning issue, given the persistence of widespread divergence and the weak prospect for mining desired macroeconomic convergence with the current independent national fiscal and monetary policy pursuits of the participating countries. This study therefore challenges the validity of the macroeconomic convergence criteria for the WAMZ and proposes alternative evaluation criteria, in the light of recent advancements in monetary theory.

In order to address these issues, this study presents micro-founded models, rooted in New Keynesian traditions to show that (a) tests confirming widespread divergence from ideal macroeconomic benchmarks with unsustainable independent monetary and exchange rates pursuits offer a more appropriate evaluating criterion for WAMZ, if the ultimate objective is a merger with WAEMU, and (b) that trade gravity models may represent a better test for the commencement of WAMZ than macroeconomic convergence criteria.

In order to establish these, the study analyzed a panel of quarterly national macroeconomic data which spans the period 199101 to 200704 for the five WAMZ countries. Using econometrics methods, especially pooled single and simultaneous equations models, I evaluate the roles of past unsustainable independent national monetary and exchange rates policy pursuits as determinants of macroeconomic stabilizations (reflected by the inflation differential and output paps/performance vis-a-vis the WAMZ arca targets) and interim-regional