Are East African Countries Ready for a Common Currency? A Structural Vector Autoregression Analysis

The East African Community (EAC), a regional block composed of Burundi, Kenya, Rwanda, Tanzania and Uganda, has monetary integration as one of its short-term goals. This paper empirically investigates the suitability of such a project by using two different Structural Vector Autoregression (SVAR) models, which allow to identify the underlying structural shocks of the economies. The results indicate that the business cycles of these countries are generally not symmetric, and the five economies respond quite differently to shocks, suggesting that the EAC does not yet constitute an Optimum Currency Area (OCA).