Benefits and costs of currency union: A case study of the West African Monetary Zone (WAMZ)

This dissertation analyses the benefits and costs of currency unions, focusing on the proposed West African Monetary Zone (WAMZ), which consists of The Gambia, Ghana, Guinea, Nigeria, and Sierra Leone. The economic structure of the zone is characterized by low economic growth and high rate of inflation. Openness, co-movement, and labor mobility are explored for each country using econometric techniques to determine the optimum currency area (OCA) criteria. The WAMZ modified the European Union's monetary criteria to establish macroeconomic convergence for the zone, and each country was evaluated in terms of meeting these criteria. Analysis of the data reveals that none of the countries under consideration satisfies all of the convergence and OCA criteria.; To explore the benefits of WAMZ, game-theory is used to show that currency union helps countries lower their inflation rate and fosters fiscal discipline. The study also relics on the gravity model of Anderson et al. (1979) to measure the effect of currency union on trade, income, and welfare. The principal findings are that WAMZ will increase trade income, and welfare. The cost of WAMZ is examined using real exchange rate misalignment and single-equation method. The results reveal that misalignment has increased substantially across the zone since the run-up period -- 2000.; The study concludes that, despite the obvious benefits of the monetary union, these countries face significant challenges before the zone can become a full-fledged monetary union. To increase the effectiveness of WAMZ, each country must demonstrate the political will to implement serious reforms to improve economic fundamentals. The central bank should be credible and not subject to political pressure, a step that can be ensured with the adoption of the one country, one vote rule. Strict enforcement of economic policy rules is also critical. For all the countries under consideration, political stability is the center-piece for the sustainahility of the monetary union.