Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?

Abstract

This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole-compared to other SSA countries-as well as in each of its member countries.

Exchange rate misalignments and the external balance under a pegged currency system

“…We therefore consider whether a specific variable can be considered as a fundamental determinant of the current account if its PIP is greater than 0.5. The results thus show that government consumption, relative productivity and the terms of trade can be considered as the fundamentals of the real effective exchange rate in the CFA zone, in line with most previous studies (Abdih & Tsangarides, ; Couharde et al ; Coulibaly & Gnimassoun, ).…”

“…For the CFA zone countries, other studies highlight the potential influence of investment on the dynamics of the real effective exchange rate (see, e.g., Baffes, Elbadawi, & O'Connell, 1999; Roudet, Saxegaard, & Tsangarides, ; Abdih & Tsangarides, ; Elbadawi, Kaltani, & Soto, ). The net foreign assets are also often referred to as one of the major determinants of the real effective exchange rate (Couharde, Coulibaly, Guerreiro, & Mignon, ; Coulibaly & Gnimassoun, ).…”

Monnaie unique et intégration par le marché en Afrique: le cas de la CEEAC et de la CEDEAO

“…Ces travaux montrent que la Zone Franc africaine n'est pas optimale à partir d'une analyse exogène, mais tendent à valider son optimalité selon l'approche endogène (Avom, , Agbodji Akoété, ; Carrère, ; Zhao et Kim, ). Les travaux récents confirment globalement l'existence des effets endogènes d'une monnaie unique (Couharde et al ., ). La seconde voie quant à elle a été empruntée par les travaux questionnant la faisabilité de potentielles unions monétaires en Afrique.…”

“…Ce résultat, contraire à celui de Nitsch (2002) et de de Sousa (), reste conforme à celui de Rose (), Lochard (), Sadeh (), Glick et Rose (). Il rentre également en conformité avec plusieurs études menées en contexte africain (Buigut et Valev, ; Tsangarides et Qureshi, ; Zhao et Kim, ; Couharde et al ., ; Avom et Mignamissi, ). Par ailleurs, il semble plus significatif dans la CEDEAO à cause de sa taille (nombre de pays membres, PIB et populations) et de l'importance relative de son commerce intra‐CER.…”

Monetary union in West Africa and business cycles synchronicity: New evidence

“…To gauge the effectiveness of these unions in promoting welfare, a number of academic papers that have been produced over the years touch on the various aspects of the feasibility of these unions. These papers regroup, among others, the works of Bénassy‐Quéré and Coupet () on the adequacy of monetary arrangement in sub‐Saharan Africa; Buigut and Valev () and Alagidede, Coleman, and Cuestas () on the symmetry of shocks and reassertion of the same, Couharde, Coulibaly and Damette () and Couharde, Coulibaly, Guerreiro and Mignon () on the relationship between exchange rate and macroeconomic variables; Deburn et al () and Masson () on welfare effects; Alagidede et al. () and Juselius and Takat () on inflationary shocks and common economic trends; and Dufrénot () and Dufrenot and Sugimoto () on common monetary policy.…”