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Thierry KAME BABILLA University of Yaoundé II African Economic Conference (AEC) Regional Integration in Africa 28-30 October, 2013.

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Presentation on theme: "Thierry KAME BABILLA University of Yaoundé II African Economic Conference (AEC) Regional Integration in Africa 28-30 October, 2013."— Presentation transcript:

1 Thierry KAME BABILLA University of Yaoundé II African Economic Conference (AEC) Regional Integration in Africa 28-30 October, 2013

2 Outline Motivation Contribution Litterature Methodology Main results Conclusion and Policy implications

3 Motivation(1/2) CFA Zone monetary integration African policymakers Leverage Currency Unions Transactions costs Exchange rate stability Integration intensification Trade Credibility of monetary policy and economic institutions For a stable and sustainable growth Regional Integration

4 Motivation (2/2) Regional Integration in Africa Monetary integration seems to be detrimental to regional integration in Africa African institutions are not sufficiently developed Asymetrics shocks (Fielding and Shields 2001; Benigno 2004; Debrun et al 2005; Tsangarides and Qureshi 2006; Kabundi and Loots 2007; Corsetti and al. 2008). Theory of Endogeneous Currency Areas Economic and structural change of currency union Monetary integration creates ex-post structural changes Mitigate the effects of asymmetric shocks Reinforce regional integration (Frankel and Rose 1997, 1998; Baxter and Kouparitsas 2005; Calderon et al 2007; Inklaar et al. 2008).

5 In this paper Examine the effects of currency unions to the intensification of regional integration in CFA Zone. Focussing in two structural breaks, namely, trade and risk sharing according to CFA Zone features. Apply in CFA Zone a methodology that is largely recommended for the analysis of structural break whithin currency unions for regional integration.

6 Related litterature This research complements recent papers on Currency Unions for Regional Integration, via trade or risk sharing. 1. Beyond Tsangarides & Van den Boogaerde (2005), Charalambos et al. (2006), Masson (2008), Batté et al. (2009), Tapsoba (2009), Debrun et al. (2010) ;  We assess the effect of currency unions on regional integration analysis in Africa using a two-country DSGE model. 2. Beyond Lama and Rabanal (2012);  We features trade and risk sharing to analyse regional integration whithin a currency in Africa. 3. Beyond Punnoose and Peersman (2012);  We introduce risk sharing structural break with specific application to CFA zone. 3.Beyond Badarau et Levieuge (2011 );  We incorporated trade structural break with specific application in CFA Zone.

7 DSGE Model features Common Currency Areas; Two Economy sharing common currency; Bilateral Trade between CEMAC and WAEMU ; risk sharing between CEMAC and WAEMU; Bank credit market imperfection; Financial asymmetries; Economic agent behavior is analyzed separately for each economy of the currency union; The model considered seven categories of national agents in each economy, namely households, entrepreneurs, retailers, capital producers, banks, Central Bank and Government.

8 Households Each Household maximise a lifetime utility funtion to choose consumption basket and supply labor. Because the model consists of a two-country currency union, consumption is a composite index which depends on the consumption of goods produced in CEMAC and goods produced in the WAEMU, as follow:

9 Production Producers of wholesale goods  Producers in each economy of the currency union, combine labor and capital as input to produce wholesale goods.  Labor input is a composite index of households labor and entrepreneurial labor to ensure consistency of the credit market modeling. Capital producers  Capital adjustment costs is introduced  Capital producers buy units of final goods and transform them in physical capital sold to the entrepreneurs Retailers  Retailers are represented by firms, held by households, which purchase wholesale goods and retail them afterwards.  Their main role is to differentiate final goods. This behavior of retailers justifies the introduction of price inertia in the model.

10 Banks and Financial intermediation Financial relation between banks and firms:  To produce final goods, the firm acquires, in each period t, a quantity of physical capital.  Firms finance their investment project by borrowing from a bank.  Banks collects funds to household to provide loan to firms, as given: Financial relation between banks and households  Banks collect a portion of the household savings.  Households pay an audit cost to have information about thier agent (Bank).  The optimization program that defines the terms of the financial contract between the household and bank leads to the bank external financing premium :

11 Central Bank and Government Central Bank Program  The common Central Bank conducts a unique monetary policy following a standard monetary policy rule: Government Program  Governments intervene in the economy by an active policy of public spending, funded by lump sum taxes, expressed in the following general form of national fiscal rule:

12 Result 1: Impulse Response Function of Monetary Policy Shock. CEMAC(blue) vs. WAEMU(green)

13 Result 2: Impulse Response Function of Productivity Shock. CEMAC(blue) vs. WAEMU(green)

14 Result 3: Impulse Response Function of fiscal Shock. CEMAC(blue) vs. WAEMU(green)

15 Conclusion Currency union didn’t contribute to regional integration in CFA Zone because the effect of trade integration on the synchronization of the cycles is relatively low within the Zone. Currency union failed to sustain regional integration in CFA Zone because savings are less sufficient to intensify the mechanism of risk sharing within the zone, and moreover, financial asymmetries leads to the amplification of national differences among member countries. The magnitude of the effect of endogeneity is lower within the CFA Zone to accelerate regional integration process. The combination of low level of trade integration, low level of cycles synchronization and low level of the phenomenon of endogeneity, does not fundamentally change the configuration of asymmetric shocks between CFA Zone countries members.

16 Policy implication  The establishment of institutions and mechanisms for risk sharing able to offset the impact of asymmetric shocks is needed.  Policymakers should accelerate the real integration within the currency union to mitigate the amplification of product instability.  Since savings are the main channel of risk sharing in CFA Zone, regional policy to raise savings and settle in consumption behavior should be adopted.  The current and upcoming currency unions in Africa should develop regional credit markets and facilitate access to credit markets.


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