Macroeconomic imbalances in the West African Monetary Zone: Implications for monetary integration

The study analysed the macroeconomic developments in the West African Monetary Zone (WAMZ), focusing on macroeconomic imbalances for the period 2001-2022. The variables of interest in this study include inflation rate, real Gross Domestic Product (GDP) growth rate, current account balance, fiscal account balance, lending (interest) rate, and exchange rate. Using the panel vector autoregressive (PVAR) model, we performed the Granger causality test, impulse response functions, and forecast error variance decomposition. The results showed evidence of significant macroeconomic imbalances among the member states in violation of the primary and secondary convergence criteria required for monetary integration in the Zone. Furthermore, innovation in interest rate was found to induce a negative and significant response in inflation with a lag, while fiscal balance, current account, and GDP growth were positively affected. Specifically, a one standard deviation shock in interest rate led to 4.2 percent reduction in inflation in the eighth year, but an increase of 1.4 percent in fiscal balance, 0.2 percent in current account and 1.6 percent in GDP growth in the first year. It is recommended that the authorities in the Zone pursue effective macroeconomic policy mix including the macroeconomic imbalance procedure (MIP), aimed at preventing and correcting these imbalances to accelerate the attainment of a stable economic environment for a resilient monetary union.