Regime-Dependent Monetary Policy Convergence: The Case of Southern African Development Community (SADC)

This paper examines the issue of monetary policy convergence for members of the Southern African Development Community (SADC) using the Markov Switching unit root procedure. The results from the conventional unit root tests including the Dickey-Fuller and the modified Dickey-Fuller reveal that the exchange rate and inflation series are first difference stationary. The likelihood ratio tests suggest that the results from the Markov Switching ADF model should be preferred over those from the standard unit root testing procedures. In most of the cases, the results from the Markov switching ADF procedures indicate that the nominal exchange rate series are characterized by two stationary regimes. This finding provides evidence of monetary convergence among the SADC member countries. The existence of monetary convergence suggests that SADC member countries are likely to satisfy their macroeconomic convergence targets and hence attain some form of Maastricht-type criteria.