The East African Community Common Currency Feasibility: A Structural Vector Autoregressive Analysis

The ratification of the East African Community (EAC): the regional intergovernmental organization of the Republics of Kenya, Uganda, Tanzania, Rwanda and Burundi, in July 2000 calls for a close examination of the countries’ economic policy decisions that affect the level and stability of prices, long-term interest rates, the fiscal position and the nominal exchange rates. The EAC countries established a Customs Union in 2005, a Common Market in 2010, and started negotiations towards a Monetary Union in 2011. This research work seeks to explore the question: “Are the five countries that comprise the EAC ready to form a Common Currency Area?” In light of the literature on common currency, this research looks at the trade relationships, economic structure, and the shocks affecting the East African Community in order to examine the feasibility of a Common Currency.