Assessment of Monetary Union in SADC: Evidence from Cointegration and Panel Unit Root Tests

Working paper 495
Mulatu F Zerihun, Marthinus C Breitenbach and Francis Kemegue
Publication date: 
February, 2015

In this paper we investigate the likelihood of a proposed monetary union in the Southern African Development Community (SADC) being successful from the viewpoint of the Generalised Purchasing Power Parity (GPPP) hypothesis and optimum currency area (OCA) theory. We apply Johansen’s multivariate co-integration technique, panel unit root tests, Pedroni’s residual cointegration test and error correction based panel co-integration tests. The findings from this study confirm that GPPP holds among SADC member countries included in this study on account of cointegration and stationarity in real exchange rate series. The South African rand normalised long run beta coefficients of all the real exchange rates are below one except in the case of the Mauritian rupee and all bear negative signs except in the case of the Angolan New Kwanza and Mauritian rupee. This evidence support monetary union in the region except for Angola and Mauritius. However, the absolute magnitudes of the short run adjustment coefficients of SADC countries’ real exchange rates are low and bear positive signs in some cases. This finding implies that the observed slow speed of adjustment for the (log) real exchange rate of SADC member states might constrain the effectiveness of stabilization policies in the wake of external shocks, rendering SADC countries vulnerable to macroeconomic instability in the region. This result has important policy implications for the proposed monetary union in SADC.

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