Vol. 9(22), pp. 752-761, 28 November, 2015 DOI: 10.5897/AJBM2015.7803 Article Number: E41692E56400 ISSN 1993-8233 Copyright © 2015 Author(s) retain the copyright of this article http://www.academicjournals.org/AJBM African Journal of Business Management Full Length Research Paper Exchange rate dynamics and monetary unions in Africa: A fractional integration and cointegration analysis Borja Balparda 1 , Guglielmo Maria Caporale 2* and Luis A. Gil-Alana 3 1 University of Navarra, Faculty of Economics, Pamplona, Spain. 2 Department of Economics and Finance, Brunel University, London, UB8 3PH, UK. 3 University of Navarra, Faculty of Economics, Pamplona, Spain. Received 28 April, 2015; Accepted 28 September, 2015 This paper uses fractional integration and cointegration techniques to analyze nominal exchange rate dynamics in three groups of African countries aiming to form currency unions in the near future. The proposed unions are the WAMZ (West African Monetary Zone), the EAC (East African Community), and the SADC (South African Development Community). The univariate results indicate that in all but three countries (Democratic Republic of Congo, Mauritius and Madagascar) the nominal exchange rate series exhibit a unit root. Concerning the multivariate results, for the WAMZ cointegration is only found in the case of Ghana with both Gambia and Guinea; for the EAC for Rwanda with Burundi, and Tanzania with both Rwanda and Uganda. Finally, for the SADC, cointegration is found in only 15 out of 66 cases, including Swaziland with South Africa, Zambia with Malawi, and Mozambique with both Lesotho and Tanzania. The policy implications of these findings are also discussed. Key words: Monetary unions, Africa, exchange rates. INTRODUCTION In this paper we examine nominal exchange rate dynamics in three groups of African countries that are expected to form currency unions in the near future in order to assess the viability of the latter. The proposed unions are the following: the West African Monetary Zone (WAMZ), formed by Gambia, Guinea, Ghana, Liberia, Nigeria and Sierra Leone ; the East African Community (EAC) formed by Burundi, Kenya, Rwanda, Tanzania and Uganda; and the South African Development Community (SADC) formed by Angola, Botswana, Congo Democratic Republic, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Seychelles, Swaziland, Tanzania, Zambia and Zimbabwe. Each of the these three groups of countries is at a different stage in the process of introducing a common monetary policy and/or a common currency. After discussing briefly the background to the planned creation of new monetary unions, we then investigate the statistical properties of the nominal exchange rates of the currencies of these sets of countries. As it is stated by the Optimal Currency Area (OCA) a certain degree of stability and possibly similar patterns in their behaviour are desirable with a *Corresponding author. E-mail: Guglielmo-Maria.Caporale@brunel.ac.uk. Tel.: +44 (0)1895 266713. Fax: +44 (0)1895 269770. JEL classification: C22, C32, E31, F15 Authors agree that this article remain permanently open access under the terms of the Creative Commons Attribution License 4.0 International License