On The Feasibility of a Common Currency in West Africa: Evidence from a Multivariate Structural VAR

This study investigates the feasibility of proceeding with the proposed common currency in West Africa. By relying on the multivariate Structural Vector Autoregressive Approach (SVAR), the studies focuses on the symmetry, magnitude and variance decompositions of four underlying structural shocks (external/global shocks, domestic supply shocks, domestic demand shocks and exchange rate shocks) as a precondition for forming an optimal currency area. The study also emphasizes the alternative techniques of adjustment to asymmetric disturbances for economies in the sub-region. The findings reveal that there is relatively high degree of symmetry in the responses of the economies to external disturbances, while about 90% of the correlations in supply, demand and monetary shocks among West African countries are asymmetric. There are also qualified evidences that support the notion of low potential for factor mobility, intra-regional trade and openness across West African member States. The impulse responses among the countries are also dissimilar, suggesting that a Common Currency is not feasible in West Africa at the moment since the costs will outweigh the benefits. An incremental convergence approach to the introduction of a Common Currency in the region is recommended as the most viable option for West Africa.