Working Papers in Economics
No 41:
Is East Africa an Optimum Currency Area?
Beatrice Kalinda Mkenda
Abstract: The paper investigates whether the East African Community,
comprising of Kenya, Tanzania, and Uganda, constitutes an optimum currency
area or not. The East African Community has been revived, and one of the
long-term objectives of the Community is to have a common currency. The
paper employs the Generalised Purchasing Power Parity method, and various
criteria suggested by the theory of Optimum Currency Areas to investigate
the optimality of the Community as a currency area. While the various
indices that we calculated based on the theory of Optimum Currency Areas
gave mixed verdicts, the Generalised Purchasing Power Parity (G-PPP) method
supports the formation of a currency union in the region.Using the G-PPP
method, we were able to establish cointegration between the real exchange
rates in East Africa for the period 1981 to 1998, and even for the period
1990 to 1998. This finding suggests that the three countries tend to be
affected by similar shocks.
Keywords: Optimum Currency Area; Cointegration; Purchasing Power Parity; East Africa; Kenya; Tanzania; Uganda.; (follow links to similar papers)
JEL-Codes: C32; F15; O55; (follow links to similar papers)
52 pages, April 30, 2001
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