A Panel Data Approach for Testing Convergence in Real Exchange Rates in The Economic Community of West African States

Abstract

In this paper, a test for convergence in real exchange rates among the West African countries is conducted using their exchange rate gaps and the normalized exchange rate gaps. The benchmark values are the long-run values of each of the real exchange rates estimated by the method of the pooled mean group estimator. These values are used to obtain the exchange rate gaps and normalized gaps. A test is then conducted for convergence among these real exchange rates gaps and normalized gaps. The result shows that these real exchange rates converge conditionally to a common speed of convergence, an indication that they react the same way to idiosyncratic shocks.

Keywords: Panel cointegration; Idiosyncratic shocks; Fixed effects; Random effects; Individual effects; and Cluster effects.