The long-run stability of money in the proposedeast african monetary union

Abstract

This study investigates the stability of money in the proposed East African Monetary Union using annual data within 1981-2015 of five countries comprising the East African Community.A standard money demand function is designed and estimated using a bounds testing approach to cointegration and error correction modeling.Findings show that countries exhibit divergence that is articulated in terms of differences in cumulative sum (CUSUM) and CUSUM squared (CUSUMSQ) tests, short-and long-term determinants, and error correction during a shock.Based on the CUSUM and CUSUMSQ tests, results show that Burundi, Rwanda, and Tanzania have stable money demand, whereas the remaining countries, namely, Kenya and Uganda, have partial stability only.During a shock, Kenya is the fastest to restore its long-run equilibrium, followed by Tanzania and Burundi.