Working Paper 156 - Macroeconomic Shock Synchronization in the East African Community

The East African Community (EAC) economic integration has gained momentum recently, with the EAC countries aiming to adopt a single currency in 2015. This paper evaluates empirically the readiness of the EAC countries for monetary union. First, structural similarity of the EAC countries is measured in terms of similarity of production and exports. Second, the symmetry of shocks among the EAC members is examined with structural VAR. Both methods point to a low shock synchronization in the EAC, suggesting that the move to EAMU would need a thorough evaluation and preparation. The paper concludes with policies that would facilitate the EAC regional economic integration, including the possible eventual establishment of a monetary union.