Is There a SADC Business Cycle? Evidence from a Dynamic Factor Model

Working paper 651
Ntokozo Patrick Nzimande and Harold Ngalawa
Publication date: 
November, 2016

Countries that adopt a common currency automatically relinquish their monetary policy autonomy. Hence, it is imperative for countries wanting to join a currency union to ensure that their business cycles are synchronized in order to ensure symmetric propagation of the effect of monetary policy. Put differently, countries with asynchronous business cycles require country-specific policies to stabilize their economies. Thus, in this study we assess the readiness of the SADC region to adopt a single currency in 2018 as proposed. We rely on a dynamic factor model which assumes that business cycle is driven by two orthogonal factors that is a regional and idiosyncratic factors. In line with existing literature our findings suggest that SADC as whole is not ready to form a monetary union. However, CMA countries appear to be driven by a common factor thus they do not necessarily require country specific policies. Hence, they may consider adopting single currency.

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