Abstract

The successes, in the 1990s, of some established currency areas, such as the Euro and the CFA zones, re-awakened interest in their optimality as the inability of individual economies to compete in and maximally benefit from an increasingly globalized world was greatly acknowledged. This fact was not lost on the ECOWAS member countries that agreed to set up a currency union by 2020. However, the depth of the European sovereign debt crisis and its protracted duration are enough to raise concern in Abuja and other West African capitals as their self-imposed deadline for monetary integration looms. This paper tests the optimality of ECOWAS as a currency area by using two methodologies: a reduced VAR to examine the response of the economies to external price shocks from France, the UK and the US, and a co-integration analysis of the theory of Generalized Purchasing Power Parity (GPPP) to determine the existence of a co-integrating relationship between the exchange rates of four of the currencies that are currently in existence. The results of the study are mixed. The VAR model shows that external shocks from the three foreign countries do not affect all the members similarly. The effects of some of the shocks are statistically insignificant on more than half of the countries. However, the result of the cointegration analysis supports optimality as it identified at least one co-integrating equation and, in some cases, two.

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