Structural breaks in some selected WAMZ macroeconomic time series

Abstract

Anecdotal evidence shows that country-specific inflation has remained largely persistent and heterogeneous across the West African Monetary Zone (WAMZ). Uncertainty about the nature of inflation persistence often undermines regional convergence due to the asymmetric responses from monetary authorities. Consequently, the objective of this paper is to identify whether or not structural breaks exist in the price level of member countries. The paper uses the method of Lee and Strazicich (2003) with multiple breaks to identify if there were spurious rejections in the ADF tests of selected macroeconomic variables of WAMZ countries. The result fails to reject the existence of the null hypothesis of unit root for fifteen (15) variables and a second root for twenty (20) variables. With the exception of Ghana, the CPI for other member countries has a second root, indicating that inflation is explosive with hysteresis effect. This feature of inflation is associated with a similar structural dysfunction in other macroeconomic indicators, including the exchange rate, nominal gross domestic product, money supply and the lending rate. In other words, breaks in these fundamentals are important sources of persistence and hysteresis in the price level.