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An unobserved component model is used to measure the relative importance of the common shocks, and a time-varying parameter model to examine whether business cycle synchronization has changed over time. The results indicate weak synchronization, although synchronization increased after 1999 for Kenya and Tanzania. This evidence casts doubt on the feasibility of a monetary union for the EAC as scheduled by 2012. The third essay uses the gravity methodology to investigate how much more the partner states of the EAC trade among themselves than with non-partners in Africa since the EAC Treaty entered into force in 2000. We find that between 1990 and 2007 the trade among the EAC countries increased by about 73 percent more than their trade with other non-EAC African countries. The intra-EAC trade rose by 120 percent for the period between 2000 and 2007. The bi-annual cross-sectional analysis finds that trade increased by an average of 101.4 percent per year between 1990 and 2007.
TABLE OF CONTENTS 1. Introduction 1 1.1 Objectives 2 1.2 Significance of the dissertation 3 1.3 Structure of the dissertation 4 1.4 Contribution to literature on the East African Community 5 2. First Essay: Inflation Convergence in the East African Community 8 2.1 Introduction 8 2.2 A brief literature review 10 2.3 Importance of inflation convergence 13 2.4 Data 14 2.5 Unit root test for inflation convergence 19 2.5.1 Panel unit root test for inflation convergence 20 2.5.2 Pairwise test of inflation differentials 23 2.6 Unobserved component model 25 2.7 Estimation results of unobserved component model 30 2.8 Conclusion 33 3 Second Essay: Business cycle synchronization in the East African Community 35 3.1 Introduction 35 3.2 Literature review 38 3.3 Trade and labor market integration in the EAC countries 42 3.4 Nominal exchange rates in the EAC 45 3.5 Model and methodology 48 3.5.1 Structural VAR to extract demand and supply shocks 48 3.5.2 A state-space model to measure the importance of common shocks .... 51 3.6 Data 53 3.7 Correlation Analysis of structural shocks 56 3.8 Estimation of the state-space model 58 3.9 A time-varying parameter model to estimate the evolution of business cycles synchronization 61 3.10 Conclusion 66 4. Third Essay: The effect of regional integration on trade in the East African Community 69 4.1 Introduction 69 4.2 Data 72 4.3 Gravity model 77 4.4 Estimation of the Gravity Model 81 4.4.1 Pooled OLS analysis 81 vi
4.4.2 Test for trade diversion 85 4.4.3 Cross-sectional yearly analysis 86 4.4.4 Pre-and Post-EAC Treaty trade 88 4.5 Conclusion 90 References 92 Appendix: Countries in the sample for the third essay 97 Curriculum vitae 98 vn
LIST OF FIGURES Fig.l Inflation rates in the EAC countries between 1981:3 and 2009:1 16 Fig.2EAC's shares of trade in GDP 43 Fig.3 Nominal exchange rates between EAC partner states 47 Fig.4 Synchronization of demand shocks overtime 63 Fig.5 EAC's shares of trade in Africa 74 Fig.6 EAC countries' shares of trade in...