Abstract
In this paper we investigate the likelihood of a proposed monetary union in the Southern African Development Community (SADC) from the view point of the generalized purchasing power parity (GPPP) hypothesis and optimum currency area theory. We apply Johansen’s multivariate co-integration technique. The findings from this study confirm that GPPP holds among SADC member countries included in this study on account of cointegration and stationarity in real exchange rate series. South African rand normalized long run beta coefficients of all the real exchange rates are below one except in the case of the Mauritian rupee and all bear negative signs except in the case of the Angolan New Kwanza and Mauritian rupee. This is evidence that supports monetary union in the region except for Angola and Mauritius. Moreover, the panel cointegration tests also confirm the cointegration among real exchange rate series of SADC countries. However, the absolute magnitudes of the short run adjustment coefficients of SADC countries’ real exchange rates are low and bear positive signs in some cases. This finding implies that the observed slow speed of adjustment for (log) real exchange rate of SADC member states might constrain the effectiveness of stabilization policies in the wake of external shocks, rendering SADC countries vulnerable to macroeconomic instability in the region. This result has important policy implications for the proposed monetary union in SADC.
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Notes
Even though there are other economic integration initiatives in Africa, the eight regional economic integration initiatives recognized by the African Union (AU) are; Intergovernmental Authority on Development (IGAD), the Arab Maghreb Union (AMU), the Common Market for Eastern and Southern Africa (COMESA), the Economic Community of Central African states (ECCAS), the economic community of West African States (ECOWAS), the Southern African Development Community (SADC), the Intergovernmental Authority on Development (IGAD),and Community of Sahel Saharan States (CEN-SAD) (Oloruntoba 2016).
The Abuja Treaty was signed on 3 June, 1991, in Abuja, Nigeria, and entry into force on May 12, 1994 with the objective of establishing an African economic community (AEC) as an integral part of the Organization for African unity (OAU).
The fifteen countries forming SADC are Angola, Botswana, Democratic Republic of Congo, Lesotho, Malawi, Madagascar, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.
Both trace and maximum eigenvalue tests are likelihood ratio type tests, however, both operate under different assumptions regarding the deterministic part of the data generation process. The trace test tends to have more distorted sizes whereas their power in some situations superior to that of the maximum eigenvalue tests (Lütkepohl et al 2001).
An economic variable tends to be weakly exogenous if its speed of adjustment coefficient is not statistically different from zero (Harris 1995). Such a variable has no explanatory power with respect to the long run coefficients.
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Acknowledgements
The authors gratefully acknowledge Prof. George Hondroyiannis, the editor in chief of the Journal of Economic Change and Restructure and the two anonymous reviewers for their valuable comments and suggestion for the substantial improvements in this version of the paper. We also acknowledge the financial support from Economic Research Southern Africa (ERSA).
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Zerihun, M.F., Breitenbach, M.C. Is SADC an optimal currency area? Evidence from the generalized purchasing power parity test. Econ Change Restruct 51, 173–188 (2018). https://doi.org/10.1007/s10644-017-9204-7
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DOI: https://doi.org/10.1007/s10644-017-9204-7