Exchange Rates and Inflation Rates Convergence in ECOWAS

The objective of this study is to see, among ECOWAS countries, if the difference between the fixed exchange rate regime of the WAEMU countries on the one hand and the flexible regimes of the WAMZ countries on the other hand, is a factor of non-convergence of inflation rates. To do so, we have first applied the Granger causality tests to look at the causality between exchange rate and inflation; then we have used an inflation differential model (IDM) to identify the factors of convergence or non-convergence of inflation rates between WAEMU and WAMZ. Our results show that WAMZ countries, due to their flexible exchange rate regimes, are subject to exchange rate pass-through (ERPT), unlike their WAEMU neighbours. Moreover, the results of the estimates of the inflation differential model (IDM) reveal that neither the evolution of the output nor that of the money supply, on both sides, explain the non-convergence of the inflation rates between WAEMU and WAMZ countries, but they show that the non-convergence of the inflation rates is significantly linked to the difference in the evolution of the exchange rates.