Financial Development, Currency Union and Dynamic Growth in West Africa: A Panel Investigation

Abstract

The objectives of this paper are to investigate the effect of financial development and currency union on the growth of West African economies and to determine if the financial development is necessary for currency union to be more beneficial to growth in West African region. A modified model of Alfaro et al, (2004) was adopted. The sample was drawn from 12 West African countries - five  from West African Monetary zone and seven from West African Economic and Monetary Union countries. System GMM was employed to estimate the parameters. The results indicate that the effect of the currency union on West African economies is consistently negative except when interacting with market based financial system. The level of financial development is low. This implies that forming currency union will not be a good policy option at this level of financial development in West Africa as asymmetry shocks and monetary policies across countries differ. Harmonization of financial system is desired for common currency to yield intended effects.

Keywords: financial development, currency union, West Africa, growth

JEL Classification: F4, F360, G2