Currency Fusion and Trade Flows in West African Countries Application of the Gravity Model

Abstract

Currency fusion to certain extent has been a subject of discussion within the modern economic era. Though, the West Africa formed their monetary institute (i.e. West Africa Monetary Institute, WAMI) however, the practice of common currency within the region is thinly accepted. This study then focuses on the economic fundamentals of currency union within the zone placing it firmly on the context of the theory of gravity model and by extension trade, with special reference to West African countries. Panel data estimation techniques were adopted; followed by the stability tests: standardized residual and confidence ellipse. The findings indicate that population growth is risk-free to the decision on currency union and, particularly, trade is another huge benefit in return for the adoption of currency fusion program within the West African region.

Keywords: gravity model, output growth, optimum currency areas, panel co-integration, panel unit roots test, confidence ellipse, fixed effect model and random effect model.