Transcript presentation - African Development Bank

Thierry KAME BABILLA
University of Yaoundé II
African Economic Conference (AEC)
Regional Integration in Africa
28-30 October, 2013
Outline
 Motivation
 Contribution
 Litterature
 Methodology
 Main results
 Conclusion and Policy implications
Motivation(1/2)
• CFA Zone monetary
integration
Trade
• Transactions costs
• African policymakers
• Leverage
Currency
Unions
• Exchange rate stability
• Credibility of monetary
policy and economic
institutions
• For a stable and
sustainable growth
• Integration intensification
Regional
Integration
Motivation (2/2)
Regional
Integration
in
• 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).
Africa
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).
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.
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.
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.
Households
 Each Household maximise a lifetime utility funtion to choose
consumption basket and supply labor.
 C 1
C
 h 1
h
 C Ct
 h Ht
max Et  

 C 1
 h 1
k 0

k
 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:

Country






Country


1
2
C
C1 C21
  1   
C* 
1
   
C1*
1
C2*
  1   
1

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.
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:
At  Qt Kt 1  NFt  NBt
 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 :
 MaxEt 1     t 1   RtB1Bt

A
B
f
 Et    t 1    G  t 1   Rt 1Bt  Rt 1  Qt Kt 1  NFt  NBt 
Central Bank and Government
 Central Bank Program
 The common Central Bank conducts a unique monetary policy following
a standard monetary policy rule:


ˆ tUM   r
rˆt n   0 rˆt n1  1   0  1ˆtUM   2 y
 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:
 gˆ t   g gˆ t 1   gt


 gˆ *   * gˆ *   *
g t 1
gt
 t
in country 1
in country 2
Result 1: Impulse Response Function of Monetary Policy Shock.
CEMAC(blue) vs. WAEMU(green)
Result 2: Impulse Response Function of Productivity Shock.
CEMAC(blue) vs. WAEMU(green)
Result 3: Impulse Response Function of fiscal Shock. CEMAC(blue) vs.
WAEMU(green)
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.
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.