Monetary integration in ECOWAS and loss of independent monetary policy: a case study of Nigeria

The Economic community of West African States (ECOWAS) is an economic organisation among 16 countries of Africa south of the Sahara. One of the main objectives of ECOWAS is to join the member countries in a complete monetary union with a single currency and a single central banle A major disadvantage to a country of being a member of this form of monetary cooperation is the loss of independence in carrying out monetary policy. This study is an examination of the degree to which Nigeria is likely to lose independent monetary policy by participating in the ECOW AS monetary union. Since the monetary union is still at the proposal stage, the issue is addressed by examining the following question: Can Nigeria conduct an effective independent monetary policy by changing the quantity of the money stock in the economy? According to the money multiplier theory of the money stock determination, successfully changing the money stock requires the following: Firstly the money multiplier should be stable and predictable, and secondly, the monetary base should be exogenously controllable. Although the money multiplier and its determinants in Nigeria are found to be stable and predictable, both closed and opened economy analyses seem to suggest that the monetary base is endogenous. Specifically, it is found to be determined by the demand for money. This implies that the monetary base and therefore, the money stock can only be changed by changing the money demand. In this case the successful conduct of monetary policy will require a stable money demand function which is significantly linked to a control variable. Various specifications showed that the Nigerian money demand function is stable. However, the only control variable - the interest rate is not significant, suggesting that it cannot be used to affect the money demand in a significant way. These findings suggest that the Nigerian Monetary Authorities have a very limited independent monetary policy, and therefore there may be little to lose by participating in the ECOW AS monetary union.