Capital Mobility and Single Currency Adoption: Evidence from the West African Monetary Zone

Abstract

The quest of introducing a single currency in West Africa seems to be long overdue. Already, there have been three postponements and a fourth postponement is likely according to experts, simply because member countries continue to struggle to achieve the convergence criteria that were set at their initial meeting. The criteria include a single digit inflation, fiscal deficit gross domestic product ratio of less than or equal to four percent, Central Bank financing of fiscal deficit less than or equal to ten percent and gross external reserves position relative months of import cover must be equal to or greater than three months of import cover. There is, therefore, the need to look for alternatives to the convergence criteria including exploring the requirements in the optimum currency area theory. Using a panel data for the five countries in the zone for the period 1970-2010, this study investigates the level of capital mobility in the zone as specified by the theory. Employing the theoretical model based on Feldstein and Horioka paradox, capital mobility is estimated using a dynamic ordinary least square regression approach. It is observed that capital mobility within the zone is fairly high.