Exchange rate dynamics and monetary integration in the EAC contries

A major challenge for most countries in Sub-Saharan Africa is the evaluation of the exchange rate. This is more so in the East African Community (EAC) where macroeconomic and exchange rate management has been in particular challenged by massive foreign aid inflows partly as a result of Heavily Indebted Poor Countries (HIPC) initiative and other debt reliefs. In addition; improved macroeconomic management in the last decade attracted both short and medium to long term inflows to the region, as foreign investors turn to developing and emerging economies for yield. In this paper we estimate the fundamental equilibrium exchange rate (FEER) model for all the countries in the EAC and we assess the convergence of existing exchange rate regimes in the EAC. Our main contribution is that this exercise may contribute as a useful background for the ultimate decision of which exchange rate management framework will best fit the region during the transition period to monetary union.