Monetary Policy and Monetary Integration in the Economic Community of West African States (ECOWAS): Dynamic Macro Panel Analyses

Monetary integration has constituted an overarching objective of the Economic Community of West African States (ECOWAS) as reflected in the introduction of the ECOWAS Monetary Cooperation Programme (EMCP) in 1987 that defines the collective policy measures necessary to achieve a harmonised monetary system. The adoption in 2014 of a pragmatic single-track approach to monetary integration by the year 2020 and the formal adoption in June 2019 of the ‘Eco’ as the name for the single currency under the proposed ECOWAS monetary union underscore the ECOWAS authorities’ determination to forge ahead with establishment of the monetary union. In spite of the progress in instituting the requisite policy and institutional framework, there has been a dearth of empirical studies to meaningfully inform the process of harmonization of monetary policy and the transition from country-specific monetary policy to a common monetary policy framework.
This thesis contributes to filling the gap through research on important monetary policy issues in the ECOWAS by drawing on the advancement in macro panel estimation techniques. The first empirical paper investigates the viability of monetary targeting as a policy framework for the proposed common monetary policy by assessing the stability of the conventional money multiplier and the postulates of the endogenous money theory. Employing both first- and second-generation panel unit root tests and advanced panel cointegration and granger causality techniques, the results indicate that the money multiplier has been unstable. In addition, causality is shown to run from bank credit to the monetary base, broadly in line with postulates of the endogenous money theory. The second essay investigates the determinants of the demand for money in the ECOWAS by applying the common correlated effects mean group (CCEMG) and the augmented mean group (AMG) estimators. The study identified real income and inflation as the key determinants of money demand, but uncovered evidence of long-run instability in the money demand function. The final empirical chapter examined the transmission mechanism of monetary policy in the ECOWAS region by adopting the dynamic heterogeneous panel structural VAR technique developed by Pedroni (2013). Monetary policy was found to be ineffective, with weak or inoperable channels of monetary transmission. Indications of asymmetries in the country-specific responses to the common monetary policy shock were revealed.
The study concludes that monetary targeting is inappropriate as a framework for conducting a common monetary policy and that a framework based on interest rate signalling, such an Inflation Targeting (IT) Lite, could be adopted at the inception of the union while the prerequisites for a full-fledged IT regime are being instituted. Deliberate efforts to deepen financial markets and strengthen policy credibility are needed to enhance the effectiveness of the common monetary policy.