Acta Universitatis Danubius. Œconomica, Vol 13, No 4 (2017)

Abstract

Studies often conclude that SADC monetary union would be disastrous and not optimal for all member countries. This is because of the observed low, and even negative correlation amongst member countries. However, Frankel and Rose (1998) demonstrate that the degree of synchronisation is not irrevocably fixed and is endogenous to other factors. Hence, this study is set out to investigate factors influencing business cycle synchronisation in the SADC region. More precisely, we use a generalised method of moments (GMM) to investigate the influence of trade integration, financial integration, fiscal policy convergence, monetary policy similarity and oil prices (a proxy for global common shocks) on the degree of business cycle synchronisation. To conduct our analysis, we data covering the period of 1980-2014, we use bilateral data due to unavailability of regional aggregates. We find trade, fiscal policy convergence and monetary policy similarity to have a sanguine impact on the degree of synchronisation. Moreover, owing to their procyclical behavior, financial flows lead to diverging business cycles. In addition, we find oil prices to exert a negative impact on business cycle comovement in the SADC region. Our results have far-reaching policy implications for the proposed SADC monetary union- by stimulating trade, ensuring coherence in macroeconomic policies SADC could move closer to becoming an optimal currency area.