Ecowas common currency: How prepared are its members?

Mati, Sagiru; Civcir, çIrfan; Ozdeser, Hüseyin Article Ecowas common currency: How prepared are its members? Investigación Económica Provided in Cooperation with: Facultad de Economía, Universidad Nacional Autónoma de México (UNAM) Suggested Citation: Mati, Sagiru; Civcir, çIrfan; Ozdeser, Hüseyin (2019) : Ecowas common currency: How prepared are its members?, Investigación Económica, ISSN 2594-2360, Universidad Nacional Autónoma de México (UNAM), Faculdad de Economía, Ciudad de México, Vol. 78, Iss. 308, pp. 89-119, https://doi.org/10.22201/fe.01851667p.2019.308.69625 This Version is available at: https://hdl.handle.net/10419/217354 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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IE, 78(308), abril-junio de 2019 89 http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 ECOWAS COMMON CURRENCY: HOW PREPARED ARE ITS MEMBERS? Sagiru Mati Faculty of Economics and Administrative Sciences of the Near East University (Cyprus) Irfan Civcir Faculty of Political Science of the Ankara University (Turkey) Corresponding author: civ[email protected]ra.edu.tr Hüseyin Ozdeser Faculty of Economics and Administrative Sciences of the Near East University (Cyprus) Received October 13, 2018. Accepted February 7, 2019. ABSTRACT This study operationalizes the Optimum Currency Area (oca) to investigate the preparedness of Economic Community of West African States (ecowas) members to form a Monetary Union (mu). Inflation and output models are estimated, with the sample 1988:01 to 2017:12 for the former and 1967 to 2016 for the latter. Analyses of ecowas convergence criteria, impulse responses, variance decompositions and correlations of shocks of these two models, reveal that the shocks across the ecowas members are asymmetric. The conclusion is that ecowas members as a whole are not well-prepared and therefore a full-fledged pan-ecowas mu is not advisable. It is also found that members of the European Monetary Union (emu) tend to be a better fit for oca than the ecowas members. The study recommends various courses of action such as fostering coordination among Central Banks of ecowas members, and providing a fund to serve as an incentive for countries that may incur cost rather than benefit if the single currency is created. Key words: Optimal Currency Area, ecowas, emu, structural var, Blanchard-Quah decomposition. jel Classification: C13, E31, E52, E58, F33, F42. 90 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 LA MONEDA COMÚN DE LA ECOWAS: ¿CUÁN PREPARADOS ESTÁN SUS MIEMBROS? RESUMEN Utilizamos el Área Monetaria Óptima (amo) para indagar cuán preparados están los miembros de la Comunidad Económica de Estados de África Occidental (ecowas, Economic Community of West African States) para formar una Unión Monetaria (um). Estimamos modelos de inflación y producto con datos de 1988:01-2017 y 1967-2016 respectivamente. Los análisis de criterios de convergencia, impulso-respuesta, descomposición de varianza y correlación de choques de estos modelos revelan que los choques entre estos países son asimétricos. Concluimos que estos países no están bien preparados y, por tanto, una um pan-ecowas no es aconsejable. Además, los integrantes de la Unión Monetaria Europea (ume) tienden a satisfacer mejor una amo que los de ecowas. Nuestro análisis recomienda fortalecer la coordinación entre los bancos centrales de la ecowas y un fondo que incentive a los países que incurran en costos en lugar de beneficios si se crea la moneda única. Palabras clave: Área Monetaria Óptima, ecowas, ume, var estructural, descomposición Blanchard-Quah. Clasificación jel: C13, E31, E52, E58, F33, F42. 1. INTRODUCTION A lthough the world has witnessed many monetary unification 1 arrangements (Gros and Thygesen, 1998), the European Monetary Union (emu) has attracted more attention than others, particularly when the Euro was created in 2002. The emu is a union of 19 out of 28 members of the European Union. The emu members met certain convergence criteria adopted in the Maastricht Treaty signed in February, 1992. Chown (2003) provides a detailed history of monetary arrangements in the world. One of the regional organizations that follow 1 Monetary unification is used to refer any monetary arrangement in general sense. While the monetary union is used to describe any monetary arrangement established among two or more countries, for example, emu. Mati, Civcir and Ozdeser • eCOWAS common currency 91 the footsteps of the European Union in terms of structure and operation is the Economic Community of West African States (ecowas)2. Established by the Treaty of Lagos on 28th May, 1975, ecowas members have undergone series of deliberations, meetings, and policies that would lead to creating a single currency to be called Eco, similar to Euro, among its members. One of the main purposes for its establishment is to have a common currency across all the members. The designated date for actualizing this vision is 2020. As the date is fast approaching, scholars and policymakers/advisors assess the level of preparedness of the member countries for the Monetary Union (mu). For example, the ecowas conducts a convergence survey every year in the form of Convergence Report. The report evaluates the members based on the convergence criteria adopted that are similar to those of the European Union. Monetary unification entails three basic arrangements; common currency, common central bank, and hence common monetary policy (Plasmans et al., 2006). The theory that is often used in the monetary unification literature is the Optimum Currency Areas (ocas), the development of which is attributable to Mundell (1961), McKinnon (1963) and Kenen (1969). oca is one of the theories used to assess the costs and benefits of forming or joining a mu (Plasmans et al., 2006; Bayoumi and Eichengreen, 1997; Eichengreen and Bayoumi, 1996; Capie and Wood, 2003), or the nature of macroeconomic shocks among the members of a mu (De Grauwe, 2000; Khamfula and Huizinga, 2004; Chow and Kim, 2003; Zhao and Kim, 2009; Lee and Azali, 2012; Regmi, Nikolsko-Rzhevskyy and Thornton, 2015; Legrand, 2014). Monetary unification comes with both benefits and costs. Members benefit from reduced transaction costs, end of the beggar-thy-neighbor policies, the elimination of exchange rate uncertainty, and more transparent price among other things (De Grauwe, 2000). A monetary union that meets oca criteria tends to be beneficial to all members, otherwise, it is costly. Loss of country’s sovereignty over monetary policy, especially loss of control over monetary policy instruments/shock absorbers such as exchange rate and interest rate, is one of the major potential costs for the membership of mu. The magnitude of this cost is largely explained 2 eCOWAS official languages are English, French and Portuguese. 92 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 by the frequency, nature, and transmission of the shocks which impact the mu. If the nature of the shocks is asymmetric, the cost of joining an mu is substantial (Plasmans et al., 2006). Despite the effort towards realizing the common currency among the ecowas region, very few empirical studies were conducted to assess the level of members’ preparedness. Moreover, these studies employ other methodologies than the Blanchard-Quah (BQ) decomposition and focus on CFA Franc Zone (cfz)3 and West African Monetary Zone (wamz); see for example Hefeker (2010), Tsangarides and Qureshi (2008), Masson and Pattillo (2001), and Fielding and Shields (2005). This study joins other studies conducted to assess the fit of various established monetary unions such as the emu, cfz, and other proposed unions such as wamz, Association of Southeast Asian Nations (aseans) and pan-ecowas monetary union. It is devoted to assessing the suitability of forming an mu among the members of ecowas. It differs from other similar studies in terms of methodology, variables, data frequency and sample size. This paper investigates how ecowas countries respond to inflationary shocks as well as to output shocks using BQ decomposition in comparison to emu. Following the oca, this paper will evaluate the ecowas bloc in terms of symmetry of inflationary shocks and business cycle synchronization. It is expected that the outcome of this study will contribute to the current debate about the feasibility of creating the ecowas single currency, or/and at least guide the policymakers and governments of the ecowas members about the decision to join the mu. Furthermore,the outcome can help the governments of ecowas members determine their position on the cost-benefit ladder. 2. OVERVIEW OF ECOWAS The organization currently comprises fifteen member countries. They include Benin (BEN), Burkina Faso (BFA), Cote d’Ivoire (CIV), Guinea Bissau (GNB), Mali (MLI), Niger (NER), Senegal (SEN), Togo (TGO), Gambia (GMB), Ghana (GHA), Guinea (GUI), Nigeria (NGA), Sier3 Monetary union of Francophone countries whose economies are linked to the French franc. Mati, Civcir and Ozdeser • eCOWAS common currency 93 ra Leone (SLE), Cabo Verde (CPV) and Liberia (LBR) (see Masson and Pattillo, 2001). The West African Economic and Monetary Union (waemu) is made up of the first eight members, while the last two are not part of any monetary union. The remaining members comprise the wamz4. Some economic criteria known as convergence criteria, similar to Maastricht Treaty of the emu, were adopted in the name of Decision A/DEC.17/12/01 in December, 2001. These criteria were modified in Supplementary Act A/SA/4/06/12 of 29 June, 2012 on convergence agreement and macroeconomic stability between ecowas Member States (ecowas, 2017). The convergence criteria contain two categories, primary criteria and secondary criteria. The primary criteria stipulate that deficit-Gross Domestic Product (gdp) ratio should be less than 3 per cent, annual average inflation rate less than 10 per cent, gross external reserves greater than 3 months of imports. Only three member States, namely Guinea, Liberia and Nigeria met the first primary criterion as opposed to six in 2015, which were Benin (6.2%), Gambia (9.5%), Ghana (10.9%), Niger (6.1%), Sierra Leone (6.4%) and Togo (8.5%). As for the second primary criterion, only Ghana, Nigeria, and Sierra Leone recorded an inflation rate of more than 10% in 2016. In 2015, all ecowas members other than Ghana recorded an inflation rate of less than 10%. The Anglophone countries recorded higher inflation rates. The higher inflation rates could be attributable to the depreciation of the currencies of these members in 2015 and 2016. The target of the third primary criterion was previously six months of imports, but was reduced to three months of imports in 2015. In 2016, only Gambia (2.4 months), Ghana (2.8 months) and Guinea (1.4 months) did not meet this criterion. Nigeria (6.5 months) and Cabo Verde (6.4 months) had the largest coverage of imports in both 2015 and 2016 (ecowas, 2017). The secondary criteria require debt-gdp ratio to be lower than 70 per cent, Central bank financing of the budget deficit should not be above 10 per cent of the previous year’s tax revenue, and variation of nominal exchange rate to be within the band of ±10 per cent. Only Cabo Verde (128.6%), Gambia (117.3%) and Togo (79.4%) have not met the first 4 WAemu and WAmz were established in 1994 and 2000, respectively. 94 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 secondary criterion. Guinea, Nigeria, Gambia and Sierra Leone did not meet the second criterion. Regarding the third secondary criterion, three currencies in 2016, compared to two in 2015, experienced an average variation outside the ±10% band. The affected currencies are Guinea franc (16.4%), Nigerian naira (23.5%) and Sierra Leone leone (19.1%) as reported by ecowas (2017). 3. LITERATURE REVIEW This section reviews the existing literature about the theory and methodology employed to analyze the level of preparedness of members of economic blocs that aim to form an mu. As mentioned earlier, oca is the most common theory used to investigate the suitability of forming an mu among countries. The preconditions of forming an mu guided by the oca include that the shocks across countries have to be symmetric (Mundell, 1961), the economies need to be open (McKinnon, 1963) as well as well-diversified (Kenen, 1969). Furthermore, Plasmans et al. (2006) suggest that fiscal integration plays an important role in actualizing an mu. Regmi, Nikolsko-Rzhevskyy and Thornton (2015) and Hsu (2010) listed the major empirical methodologies for operationalizing the oca: assessing the convergence criteria of the mu candidates (Agbeyegbe, 2008), assessing the (a)symmetric nature of macroeconomic shocks (Chow and Kim, 2003), analyzing the correlation of macroeconomic variables of the potential mu members (see, for example, Rana, 2007). Employing fractional integration and cointegration as econometric methodology, Alagidede, Coleman, and Cuestas (2012) find the existence of significant heterogeneity in the behavior of inflation among the wamz countries. They suggested that policy coordination should be enhanced among the members’ central banks before embarking on an mu. Debrun, Masson and Patillo (2005) develop and calibrate a model in which the incentives to join an mu is provided by the negative spillover from the independent monetary policy. They conclude that lack of fiscal convergence is the main obstacle to forming an mu in West Africa. Their conclusion contradicts the findings of other studies that asymmetric shocks or low level of regional trade are the main obstacles for creating the mu. Fielding, Lee, and Shields (2004) use correlation analysis to argue that monetary integration among the members of CFA Franc Zone foster the extent of Mati, Civcir and Ozdeser • eCOWAS common currency 95 macroeconomic integration. Tsangarides and Qureshi (2008) apply both soft and hard clustering algorithms on some variables, selected based on oca and convergence criteria, in order to investigate the suitability of an mu among wamz as well as ecowas countries. Their cluster analysis shows significant dissimilarities among the mu candidates, especially the wamz countries. They further question the feasibility of including Ghana and Nigeria in wamz as they appear to be singletons, while other member countries tend to group together. Hefeker (2010) investigates the interactions of fiscal policy, structural reform, and monetary union. He proved that symmetric monetary policy causes fiscal authorities to adopt a distortionary fiscal policy, hence reducing their structural reform effort. He further argues that asymmetric monetary union causes further polarization among the member countries. Kunroo (2015) provides a comprehensive survey on oca literature. Houssa (2008) examines the asymmetric shocks of monetary union in West Africa. Based on a dynamic factor model, the outcome of the study reveals that correlations of supply shocks among West African countries are negative and low, and that correlations of demand shocks are more similar among the Francophone countries of the region. Chuku (2012) investigates whether West Africa should proceed with creating a common currency. The results of the structural vector autoregressive (var) indicate that symmetry in the responses of economies to external shocks is high and that correlations of their demand, supply and monetary shocks are asymmetric. Usman and Ibrahim (2012) examine how ecowas can benefit from foreign direct investment (fdi) based on European Union experience. The study shows that the main factors that have been contributing to fdi flows within the euro-zone include single currency, research and development, trades and exchange rate stability. In the light of the foregoing literature review, it could be safe to argue that no study employs BQ decomposition to analyze the level of preparedness of the ecowas members based on inflationary and output shocks. The studies that utilize this methodology mostly focus on the Asian countries (see Lee and Azali, 2012; Chow and Kim, 2003; Hsu, 2010) and the European countries (see Legrand, 2014; Boivin, Giannoni, and Mojon, 2008; Eichengreen and Bayoumi, 1996). Although Chuku (2012) uses structural var, the study focuses on other forms of shocks than inflationary shocks. It is believed that employing BQ decomposition 96 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 can provide further insight into the suitability of the ecowas members to form a full-fledged mu. 4. DATA AND METHODOLOGY International Financial Statistics (ifs) provides the monthly series of Consumer Price Index (cpi) 5 , which is used to calculate the inflation rate. gdp at constant 2010 dollars6 is obtained from the database of World Development Indicators (wdi) of the World Bank, while gdp measures output; annual percentage change in cpi measures the inflation level. As quarterly series of gdp is not available, this study employs its annual series for the analysis. The measure of output is similar to Hsu (2010) and Regmi, NikolskoRzhevskyy and Thornton (2015). This paper follows Mallick and Mohsin (2016) and Alagidede, Coleman, and Cuestas (2012) for the calculation of the inflation rate. The cpi monthly series is available from January 1988 to December 2017, and the gdp series covers the period 1967 to 2016. Specifically, inflation is calculated as the twelfth lag difference of natural logarithm of cpi, similar to Mallick and Mohsin (2016)7. Global inflation (GI) and regional inflation (RI) 8 are calculated from the global cpi (RGCPI) and regional cpi (RCPI) respectively. The United States of America (USA) and the United Kingdom (UK) are taken as global economies, as they are considered to be the dominant players in the international arena. Some studies consider the USA to represent the global economy (see for example Chow and Kim, 2003; Regmi, Nikolsko-Rzhevskyy and Thornton, 2015). However, in this study, UK is included as part of the global economy due to its influence on the Anglophone West African countries as members of Commonwealth. France, 5 The base year is 2010. 6 The indicator code is NY.GDP.MKTP.KD. 7 This study uses the twelfth lag because it employs monthly data; Mallick and Mohsin (2016) use the fourth lag because they utilize quarterly data. 8 =Σ1 t int X wX , =Σ 1 n t it it r wX , =Σ 1 n t it it g wX where wi, rt and gt stand for the individual weight, regional variable, and global variable respectively. Xt is the variable interest, Cpi or gdp, and t X is the mean of the variable. Mati, Civcir and Ozdeser • eCOWAS common currency 103 way due to the debt crisis, while the response of Malta could be attributable to its service-dominated economy. 5.2. The impulse response of domestic output For the sake of sensitivity analysis, this study performs a similar examination using gdp as the variable and Figure 3 presents the response of domestic shocks to regional and global shocks respectively. Sierra Leone, Cote d’Ivoire, Ghana, Niger, Gambia, Mali, Togo, and Senegal have analogous response to regional shocks, with the last three showing strong similarity. However, Burkina Faso appears to be unaffected by Figure 2. The response of domestic inflation to global inflationary shocks −1.0 −0.5 0.0 0.5 1.0 1.5 2.0 10 20 30 40 50 60 70 80 90 100 Cote d’Ivoire Nigeria Burkina Faso Niger Senegal Gambia Ghana Guinea Bissau ecowas −0.3 −0.2 −0.1 0.0 0.1 0.2 0.3 0.4 0.5 0.6 10 20 30 40 50 60 70 80 90 100 Austria Belgium Cyprus Finland France Greece Italy Luxemburg Malta Portugal emu 104 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 regional shocks. Liberia has exceptional response paths, largely due to its political instability. Benin shows a negative response to regional shocks partly due to Nigeria’s restriction on car import through its land borders. The bottom panel of Figure 3 describes how emu countries respond to regional shocks. All countries show a similar response, except for Luxemburg and Finland. Greece’s response is larger than that of other countries because of its debt crisis. The response of countries to global output is represented by Figure 4, with the top panel for ecowas and the bottom panel for emu. Niger, Benin and Ghana have similar paths of response to global shocks, as do Senegal, Gambia, and Burkina Faso. The paths of Togo and Cote d’Ivoire Figure 3. The response of domestic output to regional shocks −4 −3 −2 −1 0 1 2 3 4 2 4 6 8 10 12 14 16 18 20 Benin Burkina Faso Cote d’Ivoire Ghana Gambia Liberia Mali Niger Senegal Sierra Leone Togo ecowas −1.2 −0.8 −0.4 0.0 0.4 0.8 2 4 6 8 10 12 14 16 18 20 emu Austria Belgium Finland France Greece Italy Luxemburg Netherlands Portugal Spain Mati, Civcir and Ozdeser • eCOWAS common currency 105 rise and fall together. The path of Liberia is unique and so are the paths of Sierra Leone and Mali. As for the emu countries, all the countries show similar paths of responses to global shocks. Based on the foregoing analysis of inflation and output impulse responses, it is safe to admit that ecowas countries face asymmetric inflationary and output shocks. All the emu countries have a symmetric response to global output shocks, but their responses to other shocks are asymmetric. Despite the asymmetry and various magnitudes of responses, emu economies exhibit a better tendency towards oca than the ecowas economies. Figure 4. The response of domestic output to global shocks −2 −1 0 1 2 3 4 5 2 4 6 8 10 12 14 16 18 20 Benin Burkina Faso Cote d’Lovoire Ghana Gambia Liberia Mali Niger Senegal Sierra Leone Togo ecowas −0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2 4 6 8 10 12 14 16 18 20 Austria Belgium Finland France Greece Italy Luxemburg Netherlands Portugal Spain emu 106 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 5.3. Variance decomposition of inflation Tables 2 and 3 report the 2-month-ahead and 24-month-ahead variance forecast error of the inflation models. The idea is that a country should join an mu if regional shocks dominate, opt for autonomous monetary policy if the shocks are idiosyncratic, or peg its currency against the global currency if the forecast error variance is dominated by regional shocks (Regmi, Nikolsko-Rzhevskyy and Thornton, 2015; Chow and Kim, 2003). Table 2 reveals that, in the short horizon, the Francophone countries Burkina Faso, Cote d’Ivoire, Niger and Senegal are RS-dominated, where each has RS contributing more than 50 percent of its variability. On the other hand, the Anglophone countries Nigeria, Ghana, Gambia and the Lusophone country Guinea Bissau are DS-dominated, even though Nigeria has RS contributing about 43.17 percent of its variability. In the longer 24-month horizon, the Francophone countries and Nigeria are RS-dominated. However, GS contribute a very little percentage to the variability of the forecast error of all the ecowas countries. The interesting outcome is that the Francophone countries and Nigeria could be suitable for an mu, while the other members of ecowas should have an independent monetary authority. Table 3 reports the 2-month and 24-month variance forecast error of the inflation model for emu. It is observable that Finland, France, Greece, Italy, and Portugal are GS-dominated, while Austria, Belgium, Cyprus, Luxembourg, and Malta are DS-dominated both in the short and long horizons. None of the emu countries is dominated by RS. 5.4. Variance decomposition of output Tables 4 and 5 report the 2-year-ahead and 10-year-ahead variance forecast error of the output models. In Table 4, it is discernible that all the ecowas countries are DS-dominated, both in the short and long horizons. For the emu, Table 5 shows that only Greece, France and Spain are GS-dominated in both the short and long horizons. On the other hand, Belgium, Finland, Italy, Luxembourg, Netherlands, and Portugal are DS-dominated, with Austria indicating a blend of GS and DS domination. Mati, Civcir and Ozdeser • eCOWAS common currency 107 Table 2. Variance decomposition of inflation, ecowas Country 2-month horizon 24-month horizon GS RS DS GS RS DS Burkina Faso 4.84 57.71 37.44 2.71 80.09 17.21 Cote d’Ivoire 3.31 58.88 37.81 2.17 83 14.83 Guinea Bissau 2.15 15.13 82.73 28.96 17.39 53.65 Niger 1.91 65.8 32.29 5.29 82.83 11.88 Senegal 1.32 82.33 16.35 2.02 86.01 11.97 Gambia 5.92 16.7 77.38 9.92 14.45 75.63 Ghana 9.79 0.41 89.8 7.46 25.3 67.24 Nigeria 1.57 43.17 55.26 0.89 65.77 33.34 Table 3. Variance decomposition of inflation, emu Country 2-month horizon 24-month horizon GS RS DS GS RS DS Austria 7.3 12.39 80.31 29.41 12.26 58.33 Belgium 14.53 0.31 85.16 29.08 0.17 70.74 Cyprus 9.35 34.51 56.14 43.98 27.01 29.01 Finland 56.49 1.08 42.43 69.85 1.37 28.78 France 60.05 1.62 38.33 77.76 1.92 20.32 Greece 84.04 15.59 0.37 89.54 10 0.46 Italy 60.2 0.15 39.64 87.69 2.1 10.21 Luxemburg 43.3 4.22 52.48 63.26 7.38 29.36 Portugal 83.49 12.98 3.53 88.41 7.52 4.08 Malta 17.11 2.24 80.65 13.22 7.34 79.44 108 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 Table 4. Variance decomposition of output, ecowas Country 2-year horizon 10-year horizon GS RS DS GS RS DS Benin 20.65 2.73 76.62 20.64 2.85 76.5 Burkina Faso 8.65 0.05 91.3 8.7 0.05 91.24 Cote d’Ivoire 19.6 5.3 75.1 20.47 6.05 73.48 Ghana 3.86 11.89 84.25 6.12 11.76 82.13 Gambia 2.6 6.36 91.04 2.63 6.38 90.99 Liberia 6.02 3.31 90.67 6.84 3.03 90.13 Mali 7.31 2.8 89.89 7.5 2.8 89.7 Niger 8.34 1.87 89.78 8.62 1.98 89.39 Senegal 4.63 3.57 91.8 4.66 3.56 91.78 Sierra Leone 0.27 18.6 81.13 0.52 18.61 80.86 Togo 12.65 0.48 86.87 13.17 0.49 86.34 Table 5. Variance decomposition of output, emu Country 2-year horizon 10-year horizon GS RS DS GS RS DS Austria 41.04 9.86 49.1 41.23 9.82 48.95 Belgium 45.95 1.83 52.23 47.19 1.8 51.01 Finland 41.16 0.15 58.69 41.14 0.16 58.69 France 56.91 0.02 43.07 58.77 0.02 41.21 Greece 52.7 4.87 42.43 58.38 5.13 36.49 Italy 26.52 0.68 72.81 27.81 0.67 71.52 Luxemburg 18.45 5.23 76.32 18.47 5.23 76.29 Netherlands 42.65 2.7 54.65 42.39 2.63 54.98 Portugal 39.23 0.42 60.36 44.1 0.4 55.51 Spain 52.99 1.42 45.59 53.09 1.32 45.59 Mati, Civcir and Ozdeser • eCOWAS common currency 109 Instead of relying on BQ decomposition to recover the shocks, we also considered the Cholesky decomposition 15 for sensitivity analysis. The impulse responses of both inflation and output models for both ecowas and emu seem to have very similar paths to those generated from the structural var. Moreover, the paths of response to permanent16 output and inflationary shocks reveal information similar to the ones reported in this paper. Even though there is a little conflict between forecast error variances from the Cholesky decomposition model and those of the BQ model, the latter supersedes because the structural shocks are recovered based on economic intuitions. Moreover, the observation of forecast error variances at longer horizons does not contradict the results reported in Tables 2, 3, 4 and 5. 5.5. Correlation of the inflationary shocks This section employs correlation to determine the symmetry or otherwise of inflationary and output shocks. The variables considered in this section of the study are the residuals from the structural var for each country. These residuals are taken to be the shocks; DS, RS and GS. If the correlation is zero, negative or small, then the shocks are asymmetric, but if they are strongly positive, then they are said to be symmetric (Hsu, 2010). Panel A from Table 6 provides the correlation of domestic inflationary shocks for ecowas members. It is not surprising to see that the correlation of domestic inflationary shocks is small, zero and negative. This shows that different factors cause inflation across the ecowas countries. Correlation of regional inflationary shocks for ecowas is presented in panel B of Table 6. It can be seen that all the correlations are strongly positive and statistically significant. Therefore, the inflationary shocks across all ecowas countries are symmetric. Panel C of the same table contains the correlation of global inflationary shocks. It is also evident that the shocks are symmetric across all the ecowas countries, as the correlations are positive and strong. 15 To save space, these estimations are not reported but can be made available upon request. 16 Accumulated impulse responses are interpreted as responses to permanent shocks (Enders, 2015). 110 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 Table 6. Correlation of inflationary shocks, ecowas Panel A: Correlation of domestic inflationary shocks Country CIV NGA BFA NER SEN GMB GHA GNB CIV 1 NGA 0.15 1 BFA –0.05 0.01 1 NER 0.07 0.04 –0.15 1 SEN 0.09 0.18 –0.06 –0.07 1 GMB –0.17 –0.21 –0.24 –0.14 –0.22 1 GHA –0.08 0.04 –0.14 0.13 0.01 0.11 1 GNB –0.2 –0.05 –0.24 –0.26 –0.3 0.07 0 1 Panel B: Correlation of regional inflationary shocks Country CIV NGA BFA NER SEN GMB GHA GNB CIV 1 NGA 0.77 1 BFA 0.93 0.81 1 NER 0.94 0.82 0.98 1 SEN 0.84 0.73 0.89 0.89 1 GMB 0.85 0.74 0.9 0.91 0.85 1 GHA 0.93 0.83 0.98 0.98 0.88 0.89 1 GNB 0.91 0.8 0.94 0.95 0.86 0.85 0.95 1 Panel C: Correlation of global inflationary shocks Country CIV NGA BFA NER SEN GMB GHA GNB CIV 1 NGA 0.98 1 BFA 0.98 0.98 1 NER 0.98 0.98 0.97 1 SEN 0.95 0.94 0.94 0.96 1 GMB 0.94 0.94 0.94 0.93 0.88 1 GHA 0.95 0.94 0.94 0.94 0.9 0.91 1 GNB 0.98 0.97 0.97 0.96 0.91 0.93 0.93 1 Mati, Civcir and Ozdeser • eCOWAS common currency 111 Panels A, B and C of Table 7 summarize the correlations of inflationary shocks for emu. The table reveals that the nature of the shocks for the emu is similar to that of the ecowas; asymmetry of domestic inflationary shocks and symmetry of regional and global inflationary shocks. However, it is not surprising to see the strong positive correlation (0.65) of domestic inflationary shocks between Portugal and Greece, due to the fact that inflation in both countries could be associated with the debt crisis. Table 7. Correlation of inflationary shocks, emu Panel A: Correlation of domestic inflationary shocks Country AUS BEL CYP FIN FRA GRE ITA LUX MLT POR AUS 1 BEL 0.23 1 CYP 0.01 –0.22 1 FIN –0.3 0.09 –0.28 1 FRA 0.1 0.28 –0.18 –0.05 1 GRE –0.33 –0.43 –0.14 0.05 –0.08 1 ITA –0.07 –0.16 –0.06 –0.01 0.02 0.11 1 LUX 0.19 –0.02 –0.27 –0.07 0.06 –0.15 0.06 1 MLT –0.1 0.16 –0.2 0.01 –0.16 –0.57 –0.28 –0.1 1 POR –0.35 –0.33 –0.25 0.12 –0.02 0.65 0.25 –0.02 –0.56 1 Panel B: Correlation of regional inflationary shocks Country AUS BEL CYP FIN FRA GRE ITA LUX MLT POR AUS 1 BEL 0.89 1 CYP 0.84 0.94 1 FIN 0.83 0.88 0.87 1 FRA 0.9 0.98 0.93 0.88 1 GRE 0.86 0.93 0.88 0.85 0.92 1 ITA 0.9 0.98 0.93 0.87 0.98 0.93 1 LUX 0.91 0.98 0.93 0.88 0.98 0.92 0.98 1 MLT 0.81 0.81 0.81 0.69 0.84 0.77 0.84 0.83 1 POR 0.91 0.96 0.92 0.88 0.97 0.92 0.96 0.97 0.81 1 112 IE, 78(308), abril-junio de 2019 • http://dx.doi.org/10.22201/fe.01851667p.2019.308.69625 Panel C: Correlation of global inflationary shocks Country AUS BEL CYP FIN FRA GRE ITA LUX MLT POR AUS 1 BEL 0.83 1 CYP 0.87 0.87 1 FIN 0.88 0.87 0.96 1 FRA 0.9 0.9 0.98 0.97 1 GRE 0.46 0.53 0.53 0.48 0.51 1 ITA 0.86 0.88 0.94 0.93 0.96 0.43 1 LUX 0.9 0.89 0.97 0.96 0.99 0.52 0.95 1 MLT 0.6 0.64 0.73 0.77 0.76 0.45 0.76 0.76 1 POR 0.49 0.51 0.58 0.54 0.56 0.27 0.54 0.56 0.58 1 5.6. Correlations of output shocks Table 8 presents the correlations of domestic output shocks, regional output shocks and global output shocks in panels A, B and C respectively. The only strong positive correlations in panel A include 0.55 between Niger and Burkina Faso, 0.45 between Senegal and Burkina Faso, 0.40 between Senegal and Mali, and 0.39 between Mali and Burkina Faso. This indicates symmetry of domestic output shocks among the Francophone countries. Panels B and C show that the regional and global shocks are symmetric across all the ecowas countries. On the other hand, Table 9 is the summary of the correlations of output shocks for the emu. Panel A shows that domestic output shocks are symmetric across most emu members. Greece exhibits little or no symmetry with the rest of the emu members, as the correlations of its domestic shocks with other members are either small or negative. 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