Business Cycles Synchronisation and Symmetries in the Transition to East African Monetary Union

• Date: 01 December 2020
• Author: Hatice Erkekoglu,Aweng Peter Majok Garang
• Published date: 01 December 2020
• DOI: http://doi.org/10.1111/saje.12267

South African Journal of Economics Vol. 88:4 December 2020

doi: 10.1111/saje.12267

495

© 2020 Economic Society of South Africa

BUSINESS CYCLES SYNCHRONISATION AND SYMMETRIES

IN THE TRANSITION TO EAST AFRICAN MONETARY

UNION

AWENG PETER MAJOK GARANG*,† AND HATICE ERKEKOGLU‡

Abstract

Our paper explores the prospects for the proposed East African Monetary Union (EAMU) by

employing rigorous empirical tools to analyse business cycles synchronisation, structural cross-

correlations, spectral decomposition and regional clusters to identify different cyclical episodes,

periodicities and characterise the economic cycles of East African countries. We find that cyclical

movements reflect various idiosyncratic, common, historical and external shocks in the region.

Secondly, all countries appear to be structurally correlated with each other except for South Sudan

and Burundi. Our results also observe that the contemporaneous co-movements of East African

Community (EAC) cycles with those of Kenya and Tanzaniaare procyclical with coincidental path

shift, while the same EAC cycles appear to be acyclical with those of Burundi. Additionally, from

the spectral decomposition, Kenyan cycles take 10 years to complete, while those of Tanzania and

Rwanda take 8 years. Ugandan and Burundian cycles take approximately 5 years, while the cyclical

frequency for South Sudan corresponds to 3.3 years. Finally, the cluster characterisation of countries

reveals that South Sudan, Burundi and Rwanda form a group, while Kenya and Tanzania from a

group distinct from the rest. We urge the member countries to prioritise policies on regional risk-

sharing and adjustment mechanisms, in addition to establishing credible institutional infrastructure

that ensures surveillance and enforcement of convergence conditions adopted in EAMU protocol.

JEL Classification: C10, E00, E32, F15

Keywords: East African Monetary Union, Business Cycles synchronisation, Structural Symmetry,

Spectral Decomposition

1. INTRODUCTION

Our study aims at exploring the prospects for the proposed monetary union provided in

the Protocol for the Establishment of the EAMU. The protocol lays the groundwork for a

monetary union by 2024; allowing the EAC Partner States to progressively converge their

currencies into a single currency. We use superior econometric methods such as Hodrick–

Prescott (HP) filter, structural cross-correlations, spectral decomposition and cluster

analysis. Specifically, we employ the HP filter to decompose time series data on output

and analyse the synchronisation of business cycles in East Africa. We further examine

structural correlations for key indicators in the region by adopting the cross-correlation

* Corresponding author: Department of Economics, College of Social and Economic Studies,

University of Juba, Juba, South Sudan. E-mail: geologistcamp@aol.com

† Department of Economics, College of Social and Economic Studies, University of Juba

‡ Department of International Trade and Logistics, Faculty of Applied Sciences, Kayseri University

South African Journal

of Economics

496 South African Journal of Economics Vol. 88:4 December 2020

© 2020 Economic Society of South Africa

method. Our study additionally analyses spectral decompositions and regional clusters to

determine cyclical frequencies and identify various clusters, respectively.

Previous papers focused on the analysis of a monetary union in the region have not been

overly impressive in terms of volume and dynamics. These include Bayoumi and Ostry

(1997), Mkenda (2001), Buigut and Valev (2006), Buigut and Valev (2005), Mburu

(2006), Bangaké (2008), Buigut (2009), Falagiarda (2010), Kishor and Ssozi (2011),

Sheikh et al. (2011), Mafusire and Brixiova (2012), Rusuhuzwa and Masson (2012),

Asongu (2013), (2013b), Davoodi et al. (2013), Kamaludin et al. (2013), Mafusire and

Brixiova (2013), Lepetit et al. (2014), Masson and Pattillo (2014), and Miles (2015).

Thus, differently, we not only examine the synchronisation of business cycles, but also

study structural symmetries using sophisticated methods. Also, unlike other studies in-

cluding the latest paper by Caporale and Gil-Alana (2020), we recognise the importance

of the current regional dynamics with key emphasis on structural parameters by expand-

ing our scope and adding South Sudan into the regional sample despite data constraints.

Structural symmetry is particularly emphasised in the theoretical framework (the

Optimum Currency Areas Theory) that underpins our study. The theory specifically

draws a framework for defining a common currency area, while presenting the charac-

teristics of the countries that will form a monetary union. East Africa has undertaken

preliminary works through macroeconomic convergence and harmonisation of monetary

and exchange rate policies, payment and settlement systems, financial sector supervision,

as well as harmonised statistics to facilitate closer economic integration through trade,

investment and factor mobility (Drummond et al., 2014). Although recent studies by

Caporale and Gil-Alana (2020) provide guiding results, the existing empirical literature is

generally simplistic and only stops at examining asymmetry of shocks and business cycles

synchronisation without any attempts to employ superior econometric tools. Specifically,

empirical studies directed at studying the EAMU inspired by Mundell (1961) mainly

focus on the Bayoumi and Eichengreen (1992) framework to analyse the symmetry of

shocks using Structural VARs which measure the correlation of supply shocks of various

regions with those of an anchor region with very minimal further empirical emphasis.

Consequently, we enrich the literature by employing alternative rigorous empirical tools

to analyse structural symmetry in the EAC. We focus on business cycle synchronisation,

structural cross-correlations, spectral decomposition and cluster analysis to identify dif-

ferent cyclical episodes and characterise the economic cycles of the East African countries.

2. LITERATURE

2.1 The EAC

The process of integration in East Africa dates back to pre-independence periods with the

establishment of the customs union by Kenya and Uganda in 1917; later joined by the

then Tanganyika in 1927. Since then, cooperation in the region has evolved and taken

different forms such as the East African High Commission (1948–1961); East African

Common Services Organisation (1961–1967); East African Community (1967–1977);

East African Co-operation (1993–2000) and the current EAC. Since its inception on 7th

July 2000, the EAC has consistently and timely achieved formulated objectives. A cus-

toms union was achieved 7 months into the signing of the Protocol for the Establishment

of the Customs Union in March 2004. Similarly, the protocol for the Establishment of