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Lucas Critique and OCA Analysis
The Lucas critique states that It is inappropriate to estimate econometric models of the economy, in which endogenous variables appear as unrestricted functions of predetermined variables, if one proposes to use such models for the purpose of evaluating alternative economic policy regimes (Lucas, 1976).
Some studies reject, while others support, the Lucas critique. Thus, I review the merits of these studies. My review is entirely derived from the studies on EMU. Other proposed monetary unions, like SADC, have not yet made major policy shifts towards the envisaged monetary union. Hence, it seems too early to apply the Lucas critique at this stage of the proposed SADC monetary union.
Frankel and Rose (1997) assumed that the OCA criteria are jointly endogenous when they applied the well-known ―Lucas Critique‖ in their analysis of the suitability of euro zone countries for EMU. Indeed, some OCA criteria may be endogenous with respect to the process of monetary union which can bring about a change in the degree of flexibility of macroeconomic policy variables following full monetary integration (Quirici, 2005). Furthermore, a monetary union provide more highly synchronized business cycles because of increase in trade due to decrease in transaction costs and elimination of exchange-rate risk (Kapounek and Poměnková, 2012). Therefore recent studies support the hypothesis of the endogeneity of the OCA criteria during the last decade in EMU which advocates that:
The creation of EMU will facilitate rapid convergence of the participating economies, thus leading to the synchronization of economic cycles and making the need for fiscal integration and labour market flexibility less important (Mongelli, 2008).
Now the Lucas critique states that the transition to a new system of governance structurally changes economic relations and behaviour. This therefore renders irrelevant any predictions derived from the pre-transition phase. This is the essence of the contemporary criticism on the traditional OCA theory, the so-called ‗endogenous OCA‟:
CHAPTER 1 INTRODUCTION AND CONCEPTUAL FRAMEWORK
1.1Background
1.2Problem Statement
1.3Research Objectives and Questions
1.4Hypothesis
1.5Methodology & Data Sources
1.6Conceptual Framework of the Study
1.7The Scope and Limitations of the Study
1.8Structure of the Thesis
CHAPTER 2 THEORETICAL REVIEW ON ECONOMIC INTEGRATION
2.1Introduction
2.2Theory of Optimum Currency Areas
2.3Relevance of Lucas Critique and Rationality of Expectations in the OCA Analysis
2.3.1Lucas Critique OCA Analysis
2.3.2Rationality of Expectations in the OCA Analysis
2.4OCA Theory and South-South Integration
2.5Summary
CHAPTER 3 EXPERIENCES OF ECONOMIC INTEGRATION IN AFRICA – THE CASE OF SADC
3.1Introduction
3.2Why So Much Pessimism about Economic Integration in Africa?
3.3The Impact of EU-Africa Economic Partnership Agreements on PAEC
3.4Experiences of SADC Economic Integration: Achievements and Challenges
3.4.1Introduction
3.4.2SADC Macroeconomic Policy Convergence and Challenges
3.5Summary
CHAPTER 4 (Essay I) TESTING FOR STRUCTURAL SYMMETRY TOWARDS SADC MONETARY INTEGRATION
4.1Abstract
4.2Introduction
4.3Co-movement and Optimum Currency Area Theory
4.4Data and Methodology
4.4.1Data
4.4.2Methodology
4.5Results and Discussions
4.5.1The Triples Test Results
4.5.2Results from bilateral co-movement
4.6Conclusion
CHAPTER 5 (Essay II) ASSESSMENT OF MONETARY UNION IN THE SADC: EVIDENCE FROM PANEL COINTEGRATION AND UNIT ROOT TESTS
CHAPTER 6 (Essay III) NON-LINEAR APPROACHES IN TESTING PURCHASING POWER PARITY OF SADC ECONOMIES TOWARDS MONETARY UNION
CHAPTER 7 (Essay IV) EXPLORING EXCHANGE RATE BASED POLICY COORDINATION IN SADC TOWRDS MONETARY UNION
CHAPTER 8 CONCLUSION AND POLICY IMPLICATIONS
