An Optimal East African Monetary Union? Optimum Currency Area Theory and Policy Recommendations for a Sustainable Monetary Union

Abstract

This thesis examines the feasibility of the proposed East African Community Monetary Union. First, a framework is built by outlining the integration initiative in the region and synthesising the various strands of traditional and modern Optimum Currency Area theory. Alongside a descriptive evaluation of convergence and Optimum Currency Area criteria, the comprehensive analysis is centred around two models assessing the symmetry of shocks and synchronisation of business cycles. Contributions are made by updating the time horizon of underlying data as well as including the latest member of the East African Community, South Sudan, and potential candidates for future enlargements where data was available. Overall, little evidence is found in favour of a monetary union mainly due to the prevalence of asymmetric shocks, structural differences, and limited convergence. However, as the results suggest core-periphery patterns, a perspective is offered in the form of two-speed East Africa where the single currency is first introduced by Kenya, Tanzania, and Uganda and later expanded. The derived policy recommendations are split into two parts: crucial preparatory actions in the short-term, and far-reaching measures to complete the Monetary Union to ultimately decrease the fragility in the long-run.