MONEY LINKAGES AND EXCHANGE RATE REFORM FOR REGIONAL INTEGRATION IN WEST AFRICA


Kenneth Onye †1 , Okon J. Umoh 2 , Amara Favour3 , and Chuku Chuku ‡4 1Department of Economics, University of Uyo, Nigeria 2Department of Economics, University of Uyo, Uyo, Nigeria and West African Institute for Financial and Economic Management (WAIFEM), Lagos, Nigeria, 3Department of Economics, Nnamdi Azikiwe University, Awka, Nigeria, 4Department of Economics, University of Uyo, Uyo, Nigeria and Centre for Growth and Business Cycle Research, University of Manchester, U.K This version: March, 2017

 

Abstract

 

 This study seeks to understand the nature of money linkages and the process of currency-volatility transmission across West African Member States. It also seeks to understand the possible channels through which currency volatility impact regional trade patterns and other macroeconomic outcomes that are central to economic integration agenda in the region. Cross sectional regression and Vector Autoregressive (VAR) multivariate GARCH will be applied to data on West African countries over the period 1980 – 2015. In the empirical exercises, the study proposes to experiment with two variants of the Multivariate Generalized Autoregressive (MGARCH) Models depending on the nature of cointegration of currency exchange rates. The MGARCH model within an error correction framework shall be deployed if currency exchange rates are cointegrated; otherwise, we shall make use of MGARCH model in differenced form within the unrestricted VAR framework. One departing feature of either of variants of our model is that it not only enables us to analyze the linkage between the exchange rate markets through VAR representations but also the volatility transmission between the markets via MGARCH specifications. The findings from this type of study will, therefore, not only enable us understand the nature of currency market linkages and its implications for financial and economic integration in the region but also the possibility a single major currency in the region that may potentially provide a basis for an anchor currency.



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