Nature and Extent of Shocks in COMESA: Implications for a Monetary Union

The purpose of the study is to investigate whether a monetary union between economies of the Common Market for Eastern and Southern Africa (COMESA) is viable by analyzing the nature, extent and consequences of shocks in these economies during 1990-2009. This study analyzes internal shocks captured by demand and supply shocks, and external shocks captured by exchange rate shocks. The study adopts the Vector Autoregressive (VAR) approach to identify and analyze shocks based on the aggregate demand-aggregate supply framework, while for external shocks, exchange rates variability, symmetry and persistence is analyzedfollowing the framework developed by Von Hagen and Neumann (1994).The empirical results suggest that there is a possibility for a monetary union in the COMESA region. However, an untimely monetary union can hurt the participating economies by exposing them to large variations in prices to facilitate real exchange adjustments. In addition, with less than optimal factor mobility in these countries and in the absence of an effective compensating mechanism, a monetary union might make these countries more vulnerable to shocks, thereby limiting the potential benefits of monetary integration.