Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa

•We analyze the optimality of a monetary union using its members' competiveness.•We show that misalignment is a global indicator of a monetary union's optimality.•Using cluster analyses, we compare our method and findings to previous studies.•We tackle the issue of model uncertainty to check the robustness of our findings.

This paper aims to study the optimality of a monetary union in West Africa by using a new methodology based on the analysis of convergence and co-movements between exchange rate misalignments. Two main advantages characterize this original framework. First, it brings together the information related to several optimum currency area criteria-such as price convergence, terms of trade shocks, trade and fiscal policies-going further than previous studies which are mainly based on only one criterion at a given time. Second, our study detects potential competitiveness differentials which play a key role in the debate on the optimality or not of a monetary union, as evidenced by the recent crisis in the Euro area. Relying on the recent panel cointegration techniques, cluster analyses and robustness tests, our results show that the WAEMU area is the most homogeneous area in Central and Western Africa and could be joined by Ghana, Gambia and, to a lesser extent, Sierra Leone, and that Ghana and Senegal appear to be the best reference countries for the creation of the whole West Africa monetary union.