The endogeneity of business cycle synchronisation in SADC: A GMM approach

Abstract

Studies often conclude that the proposed Southern African Development Community monetary union would be disastrous and not optimal for all member countries. This is because of the observed low, and sometimes negative business cycle correlation amongst member countries. However, it has been demonstrated that the degree of synchronisation is not irrevocably fixed and is endogenous to certain economic factors. This study, therefore, sets out to investigate factors influencing business cycle synchronisation in the SADC region. More precisely, the study employs a generalised method of moments to investigate the influence of trade integration, financial integration, fiscal policy convergence, monetary policy similarity and oil prices (a proxy for global common shocks) on the degree of business cycle synchronisation. To conduct our analysis, we use data covering the period 1994–2014. In addition, we employ bilateral data as a way of getting around the problem of unavailability of aggregated regional data. The study finds trade, fiscal policy convergence and monetary policy similarity to have a sanguine impact on the degree of business cycle synchronisation. In addition, owing to their procyclical behaviour, it is observed that financial flows lead to diverging business cycles. Furthermore, the study finds that oil prices exert a negative impact on business cycle comovement in the SADC region. The study results have far-reaching policy implications for the proposed SADC monetary union. It is implied in the study findings that by stimulating trade and ensuring coherence in macroeconomic policies, SADC can move closer to being an optimal currency area.

Keywords:

• business cycles
• synchronisation
• trade integration
• financial integration
• monetary union

JEL Classifications:

• E32
• F15
• J50

Public Interest Statement

Southern African Development Community intends to establish a monetary union, and had planned to complete the process by 2016, followed by the introduction of a single currency in 2018. However, empirical evidence suggests that conditions under which it is optimal to establish a monetary union are not satisfied in the region and therefore, establishing a monetary union at this stage would be disastrous and would lead to macroeconomic instabilities. However, other scholars postulate that monetary union is self-validating, i.e. establishment of a monetary union would alter the conditions to its favour. Thus, in this study we assess if the latter hypothesis would hold in Southern Africa, and if so what factors would need to be targeted in order to produce a conducive environment for a monetary union.

Acknowledgements

The authors would like to thank Dr Christian Tipoy, Adebayo Kutu, Simiso Msomi and all other members of the UKZN Macroeconomics Working Group (MWG) for their meaningful contributions. Financial Support from National Research Foundation (ZA) is highly appreciated. Moreover, we thank anonymous reviewers and the editor of the journal David Macmillan. This paper is part of Ntokozo’s PhD, titled Business Cycles, Fiscal Policy and Monetary Integration in SADC. The usually disclaimer applies.

Notes

1. SADC consists of 15 sovereign member countries, Angola, Botswana, Congo Democratic Republic, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.

2. See Arellano (2003) for more discussion.

3. Initially developed by Hansen (1982), Hansen and Singleton (1982).

4. Holtz-Eakin, Newey, and Rosen (1988) also suggest the same thing.

5. We also estimated fixed effects model and Generalised Least Squares estimators. The results are available upon request.

Additional information

Notes on contributors

Ntokozo Patrick Nzimande

Ntokozo Nzimande graduated with MCOM economics at the University of KwaZulu-Natal, and later in 2015 he joined the University as an economics lecturer. At present, he is busy with his PhD in economics at the University of KwaZulu-Natal.

Harold Ngalawa

Harold Ngalawa is associate professor in Economics at the University of KwaZulu-Natal, South Africa. In addition, he also serves as a dean of Research in the College of Law and Management Studies at the University of KwaZulu-Natal. Prior to being a dean of Research he served as an Academic Leader for Higher Degrees and Research in the school of Accounting, Economics and Finance.