Business Cycle Synchronization and Core-Periphery Patterns in the East African Community

Business Cycle Synchronization and Core-Periphery Patterns in the East African Community: A Wavelet Approach

Optimum currency area theory suggests that various characteristics are needed for a successful monetary union, including similarities in economic structures for both shocks and business cycles. Accordingly, this study uses continuous wavelets to investigate business cycle synchronization among countries of the East African Community, which is, a region working toward the establishment of a monetary union by 2024. Wavelet decomposition is an alternative and powerful tool for analyzing the comovement of business cycles. Cross-wavelet coherency suggests that the business cycles of Tanzania and Uganda were in phase with that of Kenya s at high and medium frequencies in the early 1990s and after the establishment of the customs union in 2005. Wavelet spectra clustering shows that Kenya, Tanzania, and Uganda form the core of the momentary union, whereas Burundi and Rwanda form the periphery. Overall, the wavelet analysis highlights the significance of asymmetric shocks and the prevalence of core-periphery patterns, which casts doubts on the eventual viability of the East African Monetary Union.