Monetary union in West Africa and asymmetric shocks: A dynamic structural factor model approach

This paper analyzes the economic costs of a monetary union in West Africa by looking at the fluctuations of aggregate demand and aggregate supply shocks across countries. Previous studies have estimated shocks with Vector Auto-Regressive (VAR) models. This paper discusses the limitations of VAR models and applies a new technique based on dynamic factor models. The results show negative and low positive correlations among supply shocks of West African countries, indicating that these countries will find it difficult to adjust to supply shocks if they form a monetary union. However, demand shocks are more similar among the French-speaking countries of the region.