Validity of International Fisher Effect in the West African Monetary Zone

This paper investigates the validity of the International Fisher Effect in the West African Monetary Zone (WAMZ). The conventional Engle-Granger and fractional cointegration tests were employed on nominal exchange differentials and exchange rates change of all the countries within the WAMZ except Liberia due to lack of data. We observed cointegrating relationship in fifteen out of the twenty country pairs; indicating evidence of common stochastic drift in nominal exchange differentials and exchange rates change. However, the assumptions necessary for the validity of very weak International Fisher Effect were met for only between Ghana and Cape Verde and between Ghana and Sierra Leone at five percent significance level; an evidence of lack of macroeconomic coordination. It is important to note that macroeconomic coordination is necessary condition for currency union and seen as alternative to member countries meeting the convergence criterion. These findings are seen as setback to the common currency agenda of WAMZ because the findings signify lack of macroeconomic coordination among would-be currency union countries, which is a necessary condition for conduct of monetary policy.