A linear programming approach to determine an optimum value in a single currency project of West Africa

Abstract

The paper discusses the primary and secondary convergence conditions for the second monetary zone in West Africa. The focal point is however the primary conditions as these provide the basis for the attainment of the secondary conditions. Panel data for the research are obtained from the West African Monetary Agency website: www.wami.imao.org. The variables are those given in the primary conditions and these are first tested for unit root and stationarity for each country. A panel cointegration test is then applied to obtain a longrun equation which is used as an objective function in the Simplex method of linear programming with the primary conditions as constraints. The panel unit root test results show that all the variables are integrated with the degree of integration varying from zero to one for different countries. The stationarity test confirms the result, as the variables are non-stationarity in level for some countries but stationarity for others. Since the unit root and stationarity test show conflicting results, the pooled mean group estimator is used to obtain long-run cointegration equation. This equation can be applied irrespective of whether the variables are integrated or not. Linear programming is then used to obtain the optimal condition for attainment of a single currency project for West Africa. The result shows that the objective function is minima at 0.0462 with inflation contributing more to the variation in the government external reserves. The paper recommend that Central Banks in those countries preparing for second monetary zone should avoid implementing inflation targeting as a way to solving their economic problem.