Business cycles in the Maghreb: Does trade matter?

Abstract

In this paper, we test the Frankel & Rose hypothesis of Optimum Currency Area for the Maghreb countries by demonstrating how the co-movements of outputs would respond to a trade integration process. In particular, by using panel analysis over the period 1980~2010, we evaluate if a monetary integration project across these countries is endogenous. Our main result suggests that while trade intensity may help to harmonize business cycles, the magnitude of this harmonization is lower for the Maghreb countries than for industrial countries. This result is robust even when we take into consideration many control variables including intra-industry trade, economic diversification, and financial integration. Therefore, we suggest that an acceleration of trade linkage as well as product diversification should take place prior to any move towards monetary union across the Maghreb countries.