Business Cycle Synchronicity Within ECOWAS: The Eco-Core and the Eco- Periphery

Abstract

This paper investigates the extent to which business cycles of 15 ECOWAS countries are synchronized; which is one of the indicators of an optimum currency area. We employ wavelet tools to compute business cycle similarities and the distance matrix. Wavelet-spectra clustering indicates that Gambia, Sierra Leone, Liberia, Mali (we give this group the acronym GSLIM) business cycles are dissimilar to the rest of the ECOWAS. These four countries count only three percent of total ECOWAS gross domestic product (GDP) and will very likely form the Eco-periphery within the West African Monetary Zone. The Eco-core group, however, is not very homogenous as it consists of three synchronized groups led, in terms of size, by Nigeria, Ghana and Burkina Faso respectively. Core-periphery patterns present a challenge to the success of a monetary union, because, if ECOWAS countries decide to launch the ECO and thus implement a common monetary policy, countries that form the periphery group may not optimally benefit from this monetary union. This challenge is however not insurmountable; ECO countries will need to put in place risk-sharing mechanisms that will help asynchronous countries to reduce the cost of giving up their monetary policy tools.