A G-Ppp Analysis to the Eac Monetary Integration Process
Muthui, J. N.
Okara, G. A.
Makambi, S. A.
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The five East African Community (EAC) states have stepped up the push for the formation of a Monetary Union, following establishment of a Customs Union and Common Market in 2005 and 2010, respectively. In 2013, the EAC heads of states signed the Monetary Union Protocol signaling the final step towards a single currency in the region. Policy analysts have long criticized the move towards monetary integration on the grounds that the EAC economies are too dissimilar and that integration at this stage would disadvantage other partner states. Empirical results remain mixed on whether the EAC does in fact constitute an Optimum Currency Area (OCA) and thus ready for formation of a monetary union. This paper seeks to evaluate recent evidence to analyze the viability of the proposed monetary union. The paper employs the Generalized Purchasing Power Parity approach to investigate the optimality of the EAC as currency area. The study results indicate that there is co-integration between the real exchange rates in East Africa for the period 1996 to 2014. The findings suggest that the EAC states do not constitute an OCA and should hence not form a monetary union.