Abstract

This paper has explored the transmission of macroeconomic shocks among countries in the West African Monetary Zone (WAMZ). The paper has used the panel vector autoregressive (PVAR) model as the econometric technique of investigating the issues. Preliminary statistical tests, namely the panel unit root tests and cointegration tests were carried out prior to estimating the model this is to avoid statistical mis-specification and spurious results. The results of the panel unit root tests revealed that all the variables were integrated of order zero which implies that the macroeconomic shocks can be considered as transitory across the countries. However. the cointegration test revealed that the variables were not cointegrated which validated the estimation of the panel VAR model with the variables in their level form. The impulse response function revealed that the responses of the non-monetary variables, namely GDP and inflation to a one-unit standard deviation shock to the monetary variables, namely the interest rate, the exchange rate and money supply were positive and significant throughout the period horizon. The response of GDP and inflation to the shocks to monetary variables of the countries was found to be positive and significant. However, variance decomposition of the money supply accounts for the highest proportion of the mean squared error that is attributed to the shocks to other variables in the panel VAR system. Put another way, the money supply accounted for the highest proportion of the variations relative to other variables, while the interest rate accounted for the lowest proportion of the variations. It is noteworthy however that these results commensurate with the macroeconomic theory of the link among the variables. Based on findings of the paper, it is recommended that monetary authorities of the countries intensify efforts towards assuaging the macroeconomic effects of the shocks through the design of more optimal monetary policy rules, such as policies that would aim at curbing inflation, stabilizing the exchange rate, lowering the interest rate to stimulate investments and so forth.