Macroeconomic Shock Synchronization in the East African Community

Abstract

The East African Community’s (EAC) economic integration has gained momentum recently, with the EAC countries aiming to adopt a single currency in 2015. This article evaluates empirically the readiness of the EAC countries for monetary union. First, structural similarity in terms of similarity of production and exports of the EAC countries is measured. Second, the symmetry of shocks is examined with structural vector auto-regression analysis (SVAR). The lack of macroeconomic convergence gives evidence against a hurried transition to a monetary union. Given the divergent macroeconomic outcomes, structural reforms, including closing infrastructure gaps and harmonizing macroeconomic policies that would raise synchronization of business cycles, need to be in place before moving to monetary union.

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