European Crisis and Sustainability of the CFA Franc Fixity to Euro

This study aims at assessing the pertinence of a fixed exchange rate between the CFA franc and the euro during the present European crisis. The paper shows negative impact of the European crisis on the real exchange rate (RER) and the misalignment of the CFA franc, and negative effects on the macroeconomic equilibrium of the zone. In fact, an aligned exchange rate is supposed to promote the twin goals of internal and external target of equilibrium. The results from simulation of reduced equations, derived from the Dependent economy model are consistent with those already highlighted in the literature. Indeed, the outbreak of the Eurozone crisis tends to usher the RER appreciation and thus, uphold the misalignment of the CFA franc. This has a significant rippling effect on the GDP growth and trade balance. One can therefore assume that the exchange rate policy of the CFA zone should be guided towards a fluctuating exchange rate within a precised threshold as a “honeymoon effect” to curb vulnerability of external effects and promote the alignment of the exchange rate which is essential to the macroeconomic stability.