Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States

Diendere, Louis-Joel Basneouinde; Diendere, Achille Augustin; Eggoh, Jude Article Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Diendere, Louis-Joel Basneouinde; Diendere, Achille Augustin; Eggoh, Jude (2024) : Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-22, https://doi.org/10.1080/23322039.2024.2399959 This Version is available at: https://hdl.handle.net/10419/321597 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States Louis-Joel Basneouinde Diendere, Achille Augustin Diendere & Jude Eggoh To cite this article: Louis-Joel Basneouinde Diendere, Achille Augustin Diendere & Jude Eggoh (2024) Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States, Cogent Economics & Finance, 12:1, 2399959, DOI: 10.1080/23322039.2024.2399959 To link to this article: https://doi.org/10.1080/23322039.2024.2399959 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 10 Sep 2024. Submit your article to this journal Article views: 577 View related articles View Crossmark data Citing articles: 2 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE Role of central bank independence on monetary integration and business cycle synchronization in the economic community of West African States Louis-Joel Basneouinde Diendere a , Achille Augustin Diendere a and Jude Eggoh b,c a Department of Economics, CEDRES, University Thomas SANKARA, Ouagadougou, Burkina Faso; b GRANEM, University of Angers, Angers, France; c Department of Economics, University of Abomey-Calavi, Abomey-Calavi, Republic of Benin ABSTRACT This article examines the effects of monetary integration on the synchronization of the business cycle within ECOWAS (Economic Community of West African States) and contributes to the economic literature dealing with these aspects. First, the indicators of de facto and de jure central bank independence are considered to examine the role of central bank independence in the relationship between monetary integration and business cycle synchronization. Second, the ARDL error correction estimator is used to analyze both shortand long-run relationships and to address potential problems related to endogenous variables. Using panel data covering 105 country pairs from 1990 to 2020, the estimation results show a positive and statistically significant effect of monetary integration on the long-run synchronization of the business cycle. Regarding short-term synchronization, the conclusions are mixed. Overall, this study argues for the implementation of economic policy measures aimed, among other things, at complying with convergence criteria, strengthening trade agreements, and ensuring the independence of the central bank of the future monetary union. IMPACT STATEMENT This article demonstrates that monetary integration promotes long-term business cycle synchronization within ECOWAS, highlighting the importance of central bank independence. Using panel data and an ARDL method, it reveals significant effects of this integration while noting mixed results in the short term. The findings advocate for economic policies focused on convergence criteria, strengthened trade agreements, and central bank independence to enhance regional stability. ARTICLE HISTORY Received 27 December 2023 Revised 18 June 2024 Accepted 29 August 2024 KEYWORDS Monetary integration; inflation; central bank independence; business cycle synchronization; panel ARDL process; ECOWAS SUBJECTS Macroeconomics; Monetary Economics; Africa - Regional Development JEL CLASSIFICATION F36; E31; E58; E32; O55 Introduction Monetary integration, which involves the coordination of monetary policy or the adoption of a common currency by several countries, aims to promote economic convergence and stability within a region or economic bloc (Corden, 1972). This process usually involves the removal of barriers to trade and capital movements and the coordination of economic policies to promote greater economic convergence between participating countries. The benefits of monetary integration include better capital allocation, higher growth potential, lower transaction costs, and greater price transparency (Baele et al., 2004). The dynamic theory of economic integration, introduced by Balassa (1961) and further elaborated by Cooper and Massell (1965), emphasizes the dynamic effects of integration and recognizes that static analysis is not sufficient to fully capture these effects. Optimal currency area (OCA) theory, as outlined by De Grauwe and Mongelli (2005), identifies criteria for the formation of a monetary union, including similar inflation rates and business cycle synchronization (BCS), which are crucial for an effective common monetary policy (Ishiyama, 1975; Kenen, 1969; McKinnon, 1963; Mundell, 1961). BCS, a fundamental CONTACT Louis-Joel Basneouinde Diendere [email protected] Department of Economics, CEDRES, University Thomas SANKARA, Ouagadougou, Burkina Faso. ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2399959 https://doi.org/10.1080/23322039.2024.2399959 concept in macroeconomic analysis that refers to the tendency of different components of the economy to evolve similarly over time (Tapsoba, 2009; Zouri, 2020), plays a central role in this context (Diendere et al., 2024). In addition, financial and monetary dynamics have a significant impact on the economic landscape. Rapid adaptation to shocks is crucial, with increased financial and monetary linkages facilitating the redistribution of capital through comparative advantage and promoting expanded trade opportunities (Garc ıa-Herrero & Ruiz, 2008). Moreover, the transition from safe, low-return investments to higher-risk, high-return ventures leads to increased convergence of industrial structures amid widespread sectoral expansion (Heathcote & Perri, 2002; Schiavo, 2008). The deepening of financial and monetary linkages leads to increased BCS, driven by significant demand-side effects. For example, large investments by consumers from different countries in a particular stock market can trigger a simultaneous decline in demand for consumer and capital goods. At the same time, contagion effects through financial channels could amplify the cross-border effects of macroeconomic fluctuations (Kose et al., 2003). In contrast, the institutional dimension of monetary integration, associated with concepts such as time inconsistency developed by Kydland and Prescott (1977), emphasizes the potential for reduced inflation bias through an independent central bank (CBI) (Backus & Driffill, 1985; Barro & Gordon, 1983). Due to time inconsistency, many developing countries, including those of the Economic Community of West African States (ECOWAS), opt for inflation-targeting monetary policy (Mahawiya et al., 2020). The economic context is characterized by an expansion of the global money supply because of the measures taken to combat the economic crisis caused by the COVID-19 pandemic. In West Africa, inflation rose from an average of 9.7% in the period 2014–2020 to 12.7% in 2021 and 17% in 2022. In contrast to East Africa, where currencies are not pegged to each other, the West African Economic and Monetary Union (WAEMU) has a conventional currency pegging system, resulting in generally lower inflation rates. The rise in inflation in 2022 in West Africa and across the continent is primarily due to higher food and energy prices caused by the disruption of the global supply chain because of the Russian invasion of Ukraine. Many countries in West Africa are experiencing high inflation rates: inflation in Ghana rose with an average of 13% in the period 2014–2020 and from 10% in 2021 to 31.5% in 2022, from 12.1% and 11.9% to 26.1% in Sierra Leone, and from 12.3% and 17% in the same period to 18.8% in Nigeria. In addition, inflation in Burkina Faso rose from an average of 0.5% in the period 2014–2020 and 3.9% in 2021 to 14.4% in 2022, while prices in Mali rose from 0.5% and 3.9% to 9.7% in 2022 (African Development Bank, 2023). In this context, the following question arises: What role does central bank independence play in the link between monetary integration and the synchronization of the business cycle in ECOWAS countries? The main objective of this study is to assess the relevance of the establishment of a monetary union within ECOWAS considering the effects of monetary integration on business cycle synchronization. The underlying hypothesis is that central bank independence has a positive and statistically significant effect on the relationship between monetary integration and BCS within ECOWAS countries. The authorities of the Economic Community of West African States (ECOWAS) launched the Economic and Monetary Cooperation Program (EMCP) to accelerate the introduction of a common currency. This program is based on a two-pronged approach that provides for the creation of an additional currency zone alongside the West African Economic and Monetary Union (WAEMU) and the expansion of the existing monetary union. The West African Monetary Zone (WAMZ), established in 2003, comprises countries such as Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone, while the second component aims to integrate the WAEMU countries with those of the newly created WAMZ within the framework of the EMCP. This study is motivated by several factors. First, in a regional context where countries are seeking greater economic integration, it is crucial to understand how national monetary policies and coordination between central banks affect the BCS. Second, central bank independence is a key element of economic governance and its impact on regional economic convergence should be studied to inform future policy decisions. Finally, a better understanding of these dynamics can help identify potential challenges and formulate effective policies to promote economic stability and sustainable growth in the region. It is worth noting that research on the relationship between monetary integration and BCS often focuses on the effects of monetary regimes such as inflation targeting, especially in developed countries (Delgado et al., 2020; Flood & Rose, 2010; Inoue et al., 2012; Rose, 2009). This research gap highlights 2 L. -J.B. DIENDERE, A. A. DIENDERE, AND J. EGGOH the need to investigate neglected aspects such as analyzing the effects of inflation differentials on the BCS, considering the role of central bank independence, and conducting both shortand long-term analyses (Camacho et al., 2006; Frankel & Rose, 1997; Garc ıa-Herrero & Ruiz, 2008; Nzimande & Ngalawa, 2017). Conventional methods such as ordinary least squares and instrumental variables are limited in accurately assessing the impact of monetary integration on the BCS and the role of central bank independence in this relationship, which requires more robust analytical approaches. This study aims to fill these gaps by examining both de facto and de jure central bank independence on a country-by-country basis to investigate the role of central bank independence in monetary integration and its relationship with the BCS. Furthermore, this study highlights the positive role of central bank independence in promoting monetary policy cooperation and coordination within ECOWAS member countries. An independent central bank is better placed to actively engage in coordination initiatives such as the harmonization of monetary policy and the implementation of common measures to cushion economic shocks, thus promoting economic convergence. In addition, the use of the ARDL estimator with error correction enables the dynamic analysis of the relationship between monetary integration and BCS in the short and long run, solving problems related to endogenous variables and improving estimation accuracy. Finally, this study proposes an analysis of the role of political instability in the relationship between monetary integration and business cycle synchronization in ECOWAS and provides insights into the complex interplay of factors affecting regional economic stability and growth. The rest of the paper is structured as follows. The second section presents the stylized facts, while the third section is devoted to the literature review. The fourth section deals with the materials and methods, and the fifth section contains the main results and discussions. In the sixth section, robustness tests are performed. The paper ends with a conclusion. Stylized facts on monetary integration In this section, the dynamics of inflation which constitutes one of the main stylized facts of monetary integration will be presented. For this purpose, the ECOWAS is divided into a WAEMU area and a nonWAEMU area. Inflation control in the WAEMU countries Controlling inflation around the annual target of 3% is a key component of WAEMU’s monetary policy. Despite the efforts of the monetary authorities to respect this objective, the dynamics of inflation have been characterized in recent years by moderate variability, linked to several factors, such as the introduction of the Common External Tariff (CET) in 2000, the increase in VAT on certain consumer goods, food shortages caused by drought and socio-political crises in Mali and C^ ote d’Ivoire. The Union’s external dependence on energy and food also played an important role in these fluctuations. Figure 1 shows inflation trends within WAEMU countries. From 2008 to 2018, inflation rates in the WAEMU member countries varied, although the overall trends remained similar. In 2008 and 2011, inflation spiked across the Union, reaching 7.4% and 3.9% respectively, mainly due to factors such as the food and energy crisis and the post-election crisis in C^ ote d’Ivoire. Subsequently, in 2012, some countries such as Benin, Mali, and Burkina Faso recorded inflation rates that were well above the convergence threshold of 3%. In 2017, inflation rose in some countries due to domestic factors, including rising rents, food prices, and local grain prices. Rents increased in most countries, particularly in Niger and C^ ote d’Ivoire, while local cereal prices skyrocketed due to declining production in C^ ote d’Ivoire and Senegal (BCEAO, 2017). Between 2015 and 2020, however, the inflation rate stabilized in all countries in the WAEMU countries. Volatility and persistence of inflation in non-WAEMU countries Figure 2 highlights inflation trend in the non-WAEMU countries over the period 1990–2020. The price dynamic within non-WAEMU countries remains relatively more unstable and inflation is more persistent. COGENT ECONOMICS & FINANCE 3 Figure 1. Inflation rates in WAEMU countries (%). Source: Author based on data from the International Monetary Fund (IMF, 2022). Figure 2. Inflation rates in non-WAEMU countries (%). Source: Author based on data from the International Monetary Fund (IMF, 2022). 4 L. -J.B. DIENDERE, A. A. DIENDERE, AND J. EGGOH During this period, inflation in the entire WAMZ region fluctuated significantly from one year to the next, averaging 10.07%. Each country in the region experienced significant fluctuations in inflation, with some countries managing to reduce their inflation rates over time, while others maintained high levels. Nigeria in particular experienced significant fluctuations, peaking at 72.84% in 1995, while Cabo Verde has consistently had relatively low inflation rates. The monetary cooperation agreement signed in March 1998 with Portugal allowed Cabo Verde to maintain price stability. Despite generally positive trends, some WAMZ countries have struggled with high inflation rates, reflecting underlying economic or monetary challenges. In 2020, Ghana recorded the highest inflation rate at around 9.89%, while Sierra Leone averaged 8.55% from 2010 to 2020. Various factors influence inflation rates, including monetary policies, fluctuations in commodity prices—mainly oil, demographic conditions, political instability, and country-specific economic and institutional policies. Literature review This section presents the theoretical and empirical literature on the relationship between monetary integration and BCS. Theoretical literature The traditional theory of economic integration, first presented by Viner (1950), examines the advantages, such as trade creation, and disadvantages, such as trade diversion, associated with integration. Viner (1950) assumes that trade creation increases welfare, while trade diversion decreases it. The dynamic theory of economic integration, developed by Balassa (1961), goes beyond this traditional view and shifts the focus to the dynamic effects, including increased competition, investment flows, economies of scale, technology transfer, and improved productivity. By eliminating exchange rate fluctuations, monetary integration facilitates trade between member countries, promoting specialization and diversification of markets. Building on this notion of dynamic effects, Balassa’s(1961) theory focuses on broader economic integration. In contrast, monetary integration entails broader challenges, such as the loss of monetary sovereignty and the need for coordinated economic policies. These challenges should be considered when assessing the feasibility of a monetary union within the ECOWAS region. In addition, monetary integration can significantly affect the degree of specialization in international trade. Regarding this influence on trade specialization, the two-country International Real Business Cycle (IRBC) model, as proposed by Backus et al. (1992) and Baxter and Crucini (1995) suggests that bilateral trade serves as a mechanism for resource transfer between countries in response to technological shocks and ultimately reduces output correlations. Conversely, Obstfeld (1994) finds that monetary integration encourages investment in high-risk projects, promotes specialization based on comparative advantage, and allows for more efficient resource allocation. Kalemli-Ozcan et al. (2001,2003) also find that diversification of ownership through international financial markets improves the ability of regions and countries to absorb idiosyncratic shocks, thereby reducing the synchronization of business cycles between countries. Beyond the impact on trade specialization, understanding the link between monetary integration, as measured by the similarity of inflation rates among countries, and the synchronization of business cycles is crucial for grasping the effects of monetary coordination on regional macroeconomic stability. The greater similarity in inflation rates between member countries could mean a convergence of monetary policies and better coordination of economic policies, ultimately favoring closer synchronization of business cycles. This enhanced synchronization can reduce macroeconomic asymmetries and increase resilience to external economic shocks, thereby strengthening regional stability (Garc ıa-Herrero & Ruiz, 2008). In this perspective, several theoretical arguments link central bank independence and inflation using various mechanisms. The theory of time inconsistency, as elucidated by Backus and Driffill (1985) and Barro and Gordon (1983), is fundamental to understanding these mechanisms. Buchanan and Wagner (1977) and Kydland and Prescott (1977) echo the analysis of Barro and Gordon (1983), suggesting that central bank independence can reduce inflation expectations, thereby resulting in lower inflation. In the COGENT ECONOMICS & FINANCE 5 same vein, monetary integration, and central bank independence have significant implications for economic welfare and policy outcomes. While traditional integration theories underscore trade benefits and disadvantages, dynamic integration theories emphasize advantages like improved productivity and specialization, specifically in monetary integration. However, these dynamics come with challenges, including losing monetary sovereignty and policy coordination, which are particularly relevant in the ECOWAS region. The analysis of the impact of central bank independence on inflation suggests that autonomous central banks can help maintain low inflation expectations, thereby dampening actual inflation. These insights underscore the importance of institutional design and policy decisions in shaping economic outcomes, urging policymakers to consider these dynamics when formulating economic development and stability strategies. Empirical literature This sub-section presents the empirical literature on the relationship between monetary integration and the synchronization of business cycles. It then focuses on the relationship between inflation targeting, monetary policy, institutions, and the synchronization of business cycles. Inflation targeting and business cycle synchronization Macroeconomic policy plays a crucial role in shaping the degree of business cycle synchronization (BCS). Economic authorities set policy frameworks to achieve trade, monetary, and exchange rate policy objectives. An important aspect of monetary policy is inflation targeting (IT), which has become a main strategy for stabilizing inflation, particularly in emerging markets, as more and more countries adopt this system (Schmidt-Hebbel & Carrasco, 2016). Proponents of inflation targeting hypothesize that it has a positive effect on the BCS as it allows central banks to regulate interest rates to maintain a stable level of inflation, thus improving the response of domestic output to external disturbances (Flood & Rose, 2010). Cho and Rhee (2015) examine the effectiveness of IT in stabilizing the real economy, focusing on advanced countries that adopted IT in the early 1990s. Based on monetary accounting methodology over the business cycle, they conclude that monetary policy has significantly reduced business cycle fluctuations since the introduction of IT. Khan et al. (2020) show that IT has a positive impact on the BCS of South Asian countries both before and after the establishment of the South Asian Association for Regional Cooperation (SAARC), confirming the findings of Flood and Rose (2010). Delgado et al. (2020) also highlight that the adoption of IT improves BCS and emphasize the importance of credibility of announcements for cycle linkage. Moreover, their results suggest that the effects on synchronization are even more pronounced when economic agents exhibit long-term memory when assessing the credibility of inflation expectations. In summary, macroeconomic policy, especially inflation targeting, influences the synchronization of business cycles. The introduction of IT enables the regulation of interest rates to keep inflation stable and improve the responsiveness of domestic output to external shocks. Research confirms the positive effect on the synchronization of business cycles and underlines the importance of the credibility of IT announcements. Then, this approach underlines its key role in economic policy formulation. Monetary policy and business cycle synchronization Asymmetric economic imbalances between nations are often due to differences in monetary policy management (Beck, 2013). In addition to the transmission effects of monetary disturbances, macroeconomic instability affecting member countries can also lead to asymmetric shocks (De Grauwe & S en egas, 2003). The propagation of these shocks from one area to another is assumed to influence the synchronization of the business cycle (BCS) differently. According to B€ ower and Guillemineau (2006) and Dai (2014), countries that adopt a similar monetary policy stance tend to react similarly to monetary policy disturbances, which facilitates the transmission of symmetric disturbances and strengthens the BCS. Conversely, in the event of macroeconomic disturbances affecting member countries with divergent monetary policy positions, countries pursuing a concerted monetary policy approach may have difficulties in dealing with these specific disturbances independently (B€ ower & Guillemineau, 2006; Dai, 2014). Without monetary policy coordination, member countries could make individual adjustments to counter 6 L. -J.B. DIENDERE, A. A. DIENDERE, AND J. EGGOH these shocks (Fidrmuc & Korhonen, 2010). However, in a common currency area, such as the WAEMU and the CMA (Common Monetary Area) between 1960 and 2016, countries lack the flexibility to take individual monetary policy actions to respond to economic shocks affecting their economies (Mattera & Franses, 2023). Fankem and Mbesa (2023) examine the potential for an African monetary union based on the synchronization of the business cycle between five Regional Economic Communities (RECs): the East African Community, the Economic Community of Central African States, the Economic Community of West African States, the Southern African Development Community, and the Arab Maghreb Union. Using a novel continuous wavelet approach, the analysis reveals heterogeneous synchronization patterns across time and horizons between RECs. Despite controlling for overlapping memberships in several RECs, the level of synchronization remains insufficient, suggesting that African countries may not yet be fully benefiting from a common monetary policy. Mestre and Odry (2021) analyze the impact of the European Central Bank’s (ECB) monetary policy on the BCS in Europe from 2000 to 2018. Using wavelets and dynamic panel estimation methods, they suggest that the ECB’s unconventional monetary policy positively affects the BCS. In addition, fiscal policy can offset country-specific movements in business cycles (Beck, 2022). Despite initial differences in the business cycles of the member countries, Gammadigbe and Dioum (2022) find that a convergence of business cycles is likely within ECOWAS from 1990 to 2018. They emphasize the negative and non-significant influence of the similarity of the monetary base on the convergence of business cycles in ECOWAS, but a negative and significant influence within the WAEMU. Research comes to different conclusions regarding the relationship between inflation differentials and business cycle synchronization. Frankel and Rose (1997) and Nzimande and Ngalawa (2017) find a positive and statistically significant effect of inflation differentials on BCS within the SADC countries, while Garc ıa-Herrero and Ruiz (2008) observe a negative effect between Spain and the G-7 countries. However, Camacho et al. (2006) find no evidence for the influence of inflation differentials on the BCS within the European Union. Huang et al. (2015) and Nguyen et al. (2020) show different effects of different inflation rates on the BCS in China and East Asia respectively. In addition, Inklaar et al. (2008) and Nzimande and Ngalawa (2017) suggest that monetary policy coordination, as measured by the similarity of short-term interest rates or inflation rates, is associated with greater BCS in the OECD and SADC regions. To summarize, economic imbalances arise from divergences in monetary policy that affect the distribution of shocks. Cyclical synchronization depends on national responses to monetary policy disturbances, with similar monetary policy settings favoring synchronization. Unconventional monetary policy measures can increase synchronization, while monetary policy coordination can reduce it. The complexity of the interactions between inflation targeting, inflation differentials, and BCS underlines the importance of monetary policy coordination for greater economic harmonization. Institutions and cyclic synchronization The quality of institutions and governance are assumed to influence the synchronization of Business Cycles across countries. In a study conducted by Altug and Canova (2014), the relationship between institutions, culture, and business cycles was examined for a sample of 45 countries in Europe, the Middle East, and North Africa. Their findings show that better governance practices, particularly central bank independence, are associated with more robust business cycles. For countries that have adopted IT regimes, maintaining the independence of their monetary policy is essential for developing closer interactions with the rest of the world. This is particularly important for emerging economies seeking to strengthen their relations with advanced economies. Without sufficient independence, these economies could experience economic desynchronization, leading to a misalignment of economic and trade agreements. Central bank independence is crucial for the synchronization of inflation and business activity. If a central bank is independent, it can make monetary policy decisions to ensure price stability without being influenced by short-term political considerations. This promotes a more stable and predictable monetary policy and contributes to a stronger BCS between countries. Furthermore, the independence of the central bank ensures the stability of inflation, as it enables measures to be taken to combat inflation, even if these must be taken against the will of governments. Consequently, when a central bank is independent, it can ensure price stability, which in turn can COGENT ECONOMICS & FINANCE 7 on long-term business cycle synchronization within ECOWAS suggests that economies with more autonomous central banks are likely to benefit from improved monetary stability, coherent economic policies, and effective coordination among member countries. This greater independence could boost investor confidence, reduce economic uncertainty, and promote the convergence of long-term economic goals, contributing to greater synchronization of business cycles in the region, which in turn fosters deeper economic integration and sustainable growth. The effects of CBI on the relationship between monetary integration and BCS appear to be positive in the short run, although not statistically significant, except for regression (3). However, in the long run, the interaction variable has a negative and significant effect on BCS, indicating a negative influence of CBI on the relationship between monetary integration and BCS. Specifically, a 1% increase in the interaction between the inflation differential and the CBI is associated with a 0.189 and 0.041% decrease in BCS. To summarize, central bank independence has a long-term negative impact on the relationship between monetary integration and BCS. Conversely, the effects of monetary integration and central bank independence on BCS are positive and significant. In the short run, the interaction variable has a positive and significant effect on the BCS. An autonomous central bank provides short-term certainty and predictability to economic agents by prioritizing price stability, promoting better economic performance, minimizing disruptions, and improving business cycle synchronization. In the long run, however, the coefficient of the interaction variable can move in a negative direction and hinder the central bank’s ability to adapt to changing economic conditions. If the central bank focuses solely on price stability, it may neglect other important economic factors such as economic growth and employment, which can lead to poorer economic performance and inadequate inflation control. In addition, the rigidity of monetary policy can limit the central bank’s flexibility in responding to economic shocks, which can make the BCS. The negative impact of central bank independence on the relationship between inflation similarity and BCS within ECOWAS could indicate shortcomings in the region’s monetary policy and lead to economic disruption. Assume that central bank independence within ECOWAS is compromised. In this case, monetary policy could be influenced by political or budgetary considerations to the detriment of price stability objectives, which could lead to excessive price volatility and uncontrolled inflation and undermine economic stability in the region. In addition, the lack of monetary policy coordination within ECOWAS could encourage a desynchronization of the business cycle and disrupt regional economic dynamics. Thus, while central bank independence can bring short-term benefits by strengthening the relationship between the inflation differential and the BCS, it could be detrimental in the long run by limiting the central bank’s ability to adapt to economic developments. Consequently, independence and flexibility must be balanced to maximize the benefits of the BCS. Robustness check This section contains the results of the robustness tests. Firstly, the results for the interest rate spread differentials are presented, followed by the results for two ECOWAS zones: the WAEMU zone and the non-WAEMU zone. Taking into account interest rate spread differentials Table 8 shows the results of the regressions including interest rate spread differentials (IRSD) (B€ ower & Guillemineau, 2006). If the interaction variable is considered, there is a negative effect in the short term, which is not significant in the regression (3) and (4) in Table 8. In the long term, the interaction variable has a positive and significant effect on cyclical synchronization in regression (3), but a negative and non-significant effect in regression (4). The independence of central banks is crucial for ensuring price stability through monetary policy. Any breach of this independence, where policy is influenced by political or budgetary considerations rather than price stability, can lead to out-of-control inflation and disrupt the economy. This has a detrimental effect on the synchronization of business cycles and leads to economic uncertainty. 14 L. -J.B. DIENDERE, A. A. DIENDERE, AND J. EGGOH Suppose, however, that the central bank exerts a stable and predictable influence on interest rates to adjust the money supply. In this case, it promotes economic growth and the synchronization of the business cycle by ensuring stable financing of economic activity. Consequently, the independence of the central bank in the relationship between the inflation differential and synchronization can have a negative impact on the synchronization of the business cycle. On the other hand, it can have a positive impact on the relationship between the interest rate differential and business cycle synchronization, thanks to its influence on the amount of liquidity available in the economy. Taking into account the different ECOWAS zones Table 9 shows the results of the robustness regressions for the WAEMU and non-WAEMU zones of ECOWAS. The analysis of the relationship between monetary integration and business cycle synchronization by country group shows different results. In the WAEMU zone, this relationship is negative and significant in the long run, while it is positive and significant in the non-WAEMU zone. In addition, the interaction variable between inflation and central bank independence is positive and significant for the WAEMU countries, but negative and significant for the non-WAEMU zone. Table 8. Estimation results including interest rate spread differentials. (1) (2) (3) (4) PMG PMG PMG PMG VARIABLES De jure De facto De jure De facto Short term ECT −0.943 −0.945 −0.946 −0.957 (0.045) (0.058) (0.044) (0.062) LD.BCS 0.061 0.083 0.0460.107 (0.025) (0.037) (0.026) (0.038) D.REER 0.091 0.014 0.061 0.036 (0.062) (0.076) (0.060) (0.078) LD.REER 0.056 0.114 0.049 0.114 (0.054) (0.073) (0.053) (0.075) D.TOPEN −0.006 −0.004 −0.012 0.000 (0.013) (0.018) (0.013) (0.018) LD.TOPEN 0.005 0.023 0.002 0.027 (0.014) (0.015) (0.015) (0.016) D.SIZE 1.252 0.948 1.240 0.990 (0.193) (0.229) (0.195) (0.237) LD.SIZE −0.448 −0.419 −0.316 −0.446 (0.120) (0.150) (0.122) (0.165) D. IRSD −0.519 −0.560 −0.771 −0.588 (0.557) (0.521) (0.934) (0.469) LD. IRSD 0.096 0.621 0.222 0.839 (0.187) (0.678) (1.149) (0.917) D.CBI 0.001 −0.011 −0.377 −0.028 (0.069) (0.003) (0.380) (0.036) LD.CBI 0.018 −0.003 −0.561 −0.016 (0.201) (0.002) (0.595) (0.024) D.IRSDCBI −0.379 0.090 (5.126) (0.260) LD.IRSDCBI −1.492 −2.023 (7.796) (2.238) Constant 0.169 0.097 0.146 0.117 (0.010) (0.009) (0.009) (0.010) Long term REER −0.044 −0.034 −0.036 −0.029 (0.010) (0.010) (0.010) (0.009) TOPEN 0.003 0.001 0.008 0.000 (0.006) (0.006) (0.005) (0.005) SIZE −0.024 −0.015 −0.023 −0.017 (0.005) (0.004) (0.005) (0.004) IRSD −0.065 −0.064 0.042−0.043 (0.019) (0.018) (0.025) (0.019) CBI 0.033 0.022 0.033 0.027 (0.012) (0.003) (0.027) (0.005) IRSDCBI 0.097−0.053 (0.156) (0.034) Observations 3045 2262 3045 2262 Notes: Standard errors in brackets; PMG ¼Pooled Mean Group. p<0.01; p<0.05; p<0.1. Source: Author. COGENT ECONOMICS & FINANCE 15 Setting an inflationary convergence threshold of 3% can lead to economic cycles becoming unbalanced due to suboptimality. For example, C^ ote d’Ivoire might have to increase its inflation rate to achieve a certain level of growth. In contrast, a threshold of 3% could be appropriate for the growth of the Togolese economy. Thus, an inflation threshold of around 3% could be a constraint for C^ ote d’Ivoire, which would favor growth in Togo. Taking political instability into account The results of the regressions including political instability are shown in Table 10. In the short run, the coefficient of the interaction variable between the inflation differential (INFL) and political instability (PINST) is positive but not significant. In the long run, however, it becomes negative and significant. These observations illustrate the detrimental effects of non-democratic changes of government on the relationship between inflation differential and business cycle synchronization, especially when they do not match in other countries in the long run. Table 9. WAEMU vs. non-WAEMU countries. WAEMU Non-WAEMU (1) (2) (3) (4) (5) (6) PMG PMG PMG PMG PMG PMG VARIABLES De jure De facto De jure De facto De jure De jure Short term ECT −0.939 −0.902 −0.890 −0.913 −0.942 −0.974 (0.086) (0.064) (0.061) (0.061) (0.097) (0.079) LD.BCS −0.003 0.002 −0.017 0.022 0.005 −0.000 (0.047) (0.056) (0.037) (0.065) (0.063) (0.051) D.REER −0.388 −0.239 −0.225 −0.169 0.126 0.056 (0.152) (0.153) (0.148) (0.181) (0.080) (0.065) LD.REER 0.080 0.147 0.149 0.221 0.011 (0.270) (0.252) (0.279) (0.273) (0.102) D.TOPEN −0.006 −0.007 −0.004 −0.023 0.038−0.010 (0.033) (0.038) (0.039) (0.035) (0.021) (0.018) LD.TOPEN −0.010 0.003 −0.024 0.012 0.044 (0.027) (0.030) (0.023) (0.028) (0.024) L2D. TOPEN 0.056 (0.025) D.SIZE 1.566 1.508 1.373 1.603 0.508 0.640 (0.323) (0.312) (0.293) (0.329) (0.549) (0.533) LD.SIZE −0.098 −0.306 −0.240 −0.433 (0.204) (0.237) (0.230) (0.252) D.INFL −0.021 −0.033 −0.034 0.041 −2.4630.005 (0.089) (0.104) (0.386) (0.112) (1.496) (0.022) LD.INFL −0.039 −0.047 0.371 0.038 −0.899 (0.076) (0.106) (0.265) (0.101) (1.023) D.CBI 0.046 −0.010 0.015 −0.038 −0.168 0.450 (0.022) (0.004) (0.023) (0.036) (0.372) (0.340) LD.CBI 0.062 0.002 0.0360.015 (0.022) (0.004) (0.020) (0.008) D.(INFLCBI) −0.108 0.852 15.519 (0.858) (3.174) (9.598) LD.(INFLCBI) −1.046 −0.198 7.580 (0.643) (0.662) (7.038) Intercept −1.165 −0.182 −0.910 −0.186 0.633 0.468 (0.114) (0.013) (0.065) (0.012) (0.065) (0.037) Long term REER 0.512 0.143 0.359 0.104 −0.018 0.033 (0.073) (0.053) (0.063) (0.051) (0.023) (0.019) TOPEN 0.033 0.030 0.043 −0.001 −0.073 −0.033 (0.015) (0.013) (0.014) (0.011) (0.014) (0.012) SIZE 0.123 0.014 0.101 0.015 −0.074 −0.056 (0.016) (0.007) (0.015) (0.006) (0.015) (0.013) INFL −0.097 −0.030 0.4320.125 0.058 0.024 (0.025) (0.025) (0.227) (0.024) (0.021) (0.009) CBI −0.095 0.018 −0.080 0.002 0.0600.005 (0.011) (0.007) (0.014) (0.010) (0.031) (0.021) INFLCBI 0.9930.518−0.298 (0.573) (0.282) (0.103) Observations 812 812 812 812 588 609 Notes: Standard errors in parenthesis; PMG ¼Pooled Mean Group; p<0.01; p<0.05; p<0.1. Source: Author. 16 L. -J.B. DIENDERE, A. A. DIENDERE, AND J. EGGOH The main reasons for these changes of government include elections, political scandals, poor performance, and sustainability problems within multi-party governments. Regardless of their origin, these changes lead to instability and uncertainty among economic actors. The impact of these changes on local economic performance leads to desynchronization with other countries. However, when these changes of government occur simultaneously in two countries, the above-mentioned effects manifest themselves in both economies and adapt to the respective business cycles. Furthermore, the results of the analysis show that the net effect of the political instability variable is positive overall in the long term, which confirms this hypothesis. In other words, more pronounced political coordination improves the synchronization of the business cycle, even though most government changes are generally unplanned or random. Electoral changes are more predictable. Use of alternative estimation techniques Table 11 shows the results of long-term regressions obtained using regression techniques such as Dynamic Ordinary Least Squares (DOLS) and Fully Modified Ordinary Least Squares (FMOLS). These linear regression methods offer the possibility of considering various elements, including the effects of temporal correlation and endogeneity due to the cointegration of variables. The conclusions drawn from the long-run regressions using FMOLS and DOLS techniques are generally congruent in terms of the direction and statistical relevance of the coefficients. The results show that the interaction coefficient formed between the inflation differential and central bank independence has a negative and statistically significant sign in the long-run regressions (1), (2), and (3). As for regression (4), the results indicate that central bank independence has a positive and significant impact on the relationship between the inflation differential and the BCS in the long run. Overall, these results are consistent with previous outcomes obtained, using the PMG estimator. Table 10. Taking political instability into account. (1) (2) VARIABLES PMG PMG ECT −0.920 −0.912 (0.024) (0.025) D. REER 0.078 0.088 (0.050) (0.052) D.TOPEN −0.005 −0.005 (0.011) (0.011) Short term D.SIZE 1.132 1.121 (0.171) (0.172) D.INFL 0.019 0.019 (0.016) (0.065) D.PINST −0.011 −0.016 (0.003) (0.004) D.INFLPINST 0.032 (0.052) Constant 0.128 0.133 (0.005) (0.005) REER −0.023 −0.020 (0.009) (0.009) TOPEN −0.005 −0.008 (0.006) (0.006) SIZE −0.022 −0.022 Long term (0.005) (0.005) INFL 0.016 0.033 (0.005) (0.010) PINST 0.007 0.009 (0.001) (0.002) INFLPINST −0.014 (0.006) Observations 3150 3150 Notes: Standard errors in parenthesis; PMG ¼Pooled Mean Group. p<0.01; p<0.05; p<0.1. Source: Author. COGENT ECONOMICS & FINANCE 17 Conclusion and implications Monetary integration offers advantages, such as an optimal allocation of resources, but also disadvantages, such as the loss of autonomy of national monetary policy. The regressions suggest a positive and significant effect of monetary integration on the BCS, which is consistent with the literature (Frankel & Rose, 1997; Nzimande & Ngalawa, 2017). However, greater independence of the monetary union central bank can offset this loss and reinforce its credibility. Despite the persistent inflation volatility within ECOWAS, narrowing the inflation gap between countries promotes better synchronization of business cycles. Central bank independence has a positive and significant impact on this synchronization, even if it does not strengthen the relationship between inflation differentials and cycle synchronization. Several recommendations are made to ensure the success of monetary integration within ECOWAS. Firstly, the establishment of robust surveillance mechanisms is essential. This includes the creation of a framework for monitoring inflation rates and economic cycles in the member countries. By regularly monitoring these indicators, policymakers can quickly identify discrepancies and proactively address emerging issues, thereby promoting greater regional stability. Secondly, improving communication and coordination between central banks and economic policymakers is crucial. Improved cooperation can facilitate the exchange of important information on monetary and fiscal policy and promote better coordination of strategies and responses to economic fluctuations. Regional forums and meetings can serve as platforms for sharing insights, discussing common challenges, and formulating coordinated approaches to economic management. Thirdly, the promotion of policy harmonization between member countries is essential for promoting convergence and synchronization of the business cycle. This means that countries are encouraged to pursue compatible monetary and fiscal policies to achieve common goals such as price stability and sustainable growth. By aligning policy frameworks, member states can improve the effectiveness of their policies and minimize potential cross-border spillover effects. Fourthly, investment in institutional capacity is another crucial aspect in promoting the synchronization of the business cycle within the ECOWAS region. Strengthening the technical expertise and analytical skills of central banks and regulators can improve their ability to effectively assess and respond to economic developments. This can include training programs, capacity-building initiatives, and the introduction of advanced analytical tools to support evidence-based decision-making. Finally, promoting transparency and accountability in economic policy is essential for building trust and confidence among stakeholders. By ensuring that policy decisions are based on objective data and communicated to the public in a transparent manner, public authorities can enhance their credibility and promote greater adherence to sound economic principles. Transparency promotes accountability Table 11. Taking into account alternative estimation techniques. De jure De facto (1) (2) (3) (4) FMOLS DOLS FMOLS DOLS Dependent variable BCS BCS BCS BCS REER −0.050 (0.017) −0.026 (0.024) −0.034 (0.014) 0.013 (0.014) TOPEN 0.016 (0.010) 0.042 (0.016) 0.026 (0.008) 0.024 (0.008) SIZE −0.018 (0.010) 0.033 (0.007) 0.095 (0.042) 0.041 (0.006) INFL 0.044 (0.015) 0.093 (0.023) 0.022 (0.009) −0.021 (0.014) CBI 0.050 (0.023) 0.099 (0.033) 0.016 (0.003) 0.002 (0.007) INFLCBI −0.203 (0.067) −0.330 (0.103) −0.029 (0.017) 0.119 (0.050) R-squared 0.080 0.789 0.145 0.827 Adjusted R-squared 0.032 0.338 0.082 0.457 Notes: Standard errors in parenthesis; PMG ¼Pooled Mean Group. p<0.01; p<0.05; p<0.1. Source: Author. 18 L. -J.B. DIENDERE, A. A. DIENDERE, AND J. EGGOH and enables stakeholders to assess the effectiveness of policies and hold policymakers accountable for their actions. In summary, a multi-pronged approach that includes monitoring, communication, policy harmonization, institutional strengthening, and transparency is essential for promoting the synchronization of the business cycle and supporting sustainable growth in the ECOWAS region. By implementing these strategies, member countries can work together to overcome challenges and realize their shared vision of a more prosperous and resilient economic community. The benefits of integration should be shared fairly, with special consideration given to countries with weak and vulnerable economies. Well-developed and funded equalization mechanisms should be put in place to avoid fears of domination in the event of a monetary union. In addition, it would be crucial to strengthen existing trade agreements and develop new policies to promote regional integration to facilitate trade activities and reduce macroeconomic divergences between ECOWAS economies. The creation of the monetary union planned for 2027 requires the implementation of a common stabilization policy that will make it possible to eliminate macroeconomic divergences and strengthen regional integration. Note 1. https://kof.ethz.ch/en/data/data-on-central-bank-governors.html. Authors’contributions Louis-Joel B. Diendere, Achille A. Diendere, and Jude Eggoh are involved in the conception and design, respectively the analysis and interpretation of the data, the drafting of the paper, the critical review for intellectual content, and the final approval of the version to be published. Louis-Joel B. Diendere, Achille A. Diendere, and Jude Eggoh agree to be responsible for all aspects of the work. Disclosure statement The authors report that there are no competing interests to declare. About the authors Louis-Joel Diendere is a PhD candidate at Thomas Sankara University in Burkina Faso. He earned his Master’s degree from the University of Toulon in France. His research interests include Macroeconomics, Monetary Economics, and International Trade. Achille Augustin Diendere is an Associate Professor of Economics. He completed his doctoral studies at the University Toulouse 1 Capitole in France and has been a faculty member at Thomas Sankara University. His research encompasses Development Economics, Agricultural Trade and Circulation, Agricultural Resources and the Environment, Technology Adoption and its Impacts, Food Policy, and Sustainable Development. He is part of the Department of Economics and leads a research team within the Center for Economic and Social Studies, Documentation, and Research (CEDRES) at the University. Jude Eggoh is a Professor of Economics at the University of Abomey-Calavi in Benin and also teaches at the University of Angers in France. He received his Ph.D. in Economics from the University of Orl eans in France in 2009. His academic work focuses on Monetary and Fiscal Policy, Financial Systems, Growth Theories, and Development Economics. He has published over 30 articles and serves on the scientific committees of several academic journals. Additionally, Jude Eggoh is a scientific advisor to the Ministry of Economy and Finance of Benin and a consultant for various institutions. ORCID Louis-Joel Basneouinde Diendere http://orcid.org/0000-0002-7096-4943 Achille Augustin Diendere http://orcid.org/0000-0002-5477-0567 Jude Eggoh http://orcid.org/0000-0002-9550-4820 COGENT ECONOMICS & FINANCE 19 Data availability statement The data that support the findings of this study are available from the corresponding author, [a], upon reasonable request. References African Development Bank. (2023). West African Economic Outlook 2023: Mobilizing Private Sector Financing for Climate and Green Growth (p. 119). https://www.afdb.org/en/documents/west-africa-economic-outlook-2023 Altug, S., & Canova, F. (2014). 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