International Journal of Business and Economics Volume 7, No. 3 December, 2008

Nominal Exchange Rates and Price Convergence in the West African Monetary Zone

Paul Alagidede

Stirling Management School, Division of Economics, University of Stirling, U.K.

George Tweneboah

School of Management, University of Leicester, U.K.

Anokye M. Adam

School of Management, University of Leicester, U.K.

Abstract

We investigate nominal exchange rates and nominal price convergence in the West African Monetary Zone. Using data for the first quarter of 1974 through the first quarter of 2007, we find that real exchange rates in The Gambia, Ghana, Nigeria, and Sierra Leone follow a random walk. Further, we show that nominal exchange rates and nominal prices adjust at different speeds to achieve long-run purchasing power parity, with the former adjusting faster than the latter. Finally, we argue that the success (or otherwise) of a second monetary zone in West Africa depends on well coordinated macroeconomic policies and on minor divergence in prices and exchange rates to eliminate excessive arbitrage profits that may arise.

Keywords：purchasing power parity, real exchange rate stationarity, convergence, West African Monetary Zone.

JEL Classifications：C32, F31.

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