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Asymmetric Terms-of-Trade Shocks in a Monetary Union: An Application to West Africa

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  • Benjamin Carton
  • Agnès Bénassy-Quéré
  • Gilles Dufrénot
  • Loïc Batté

Abstract

We propose a two-country dynamic stochastic general equilibrium model of a monetary union facing asymmetric terms-of-trade shocks, calibrated on Nigeria and West African Economic and Monetary Union (WAEMU). Three monetary regimes are successively studied at the union level: a flexible exchange rate with constant money supply, a flexible exchange rate with an accommodating monetary policy and a fixed exchange-rate regime. We find that, in the face of oil-price shocks, the most stabilising regime for Nigeria is a fixed money supply, whereas it is a fixed exchange rate for WAEMU. However, the introduction of an oil-stabilisation fund can reduce the disagreement on the common policy rule. Furthermore, the two zones may agree on a fixed money-supply rule in the face of both oil- and agricultural-price shocks. Copyright 2010 The author 2010. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

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Bibliographic Info

Article provided by Centre for the Study of African Economies (CSAE) in its journal Journal of African Economies.

Volume (Year): 19 (2010)
Issue (Month): 5 (November)
Pages: 657-690

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Handle: RePEc:oup:jafrec:v:19:y:2010:i:5:p:657-690

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Cited by:
  1. Issiaka Coulibaly & Blaise Gnimassoun, 2013. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," EconomiX Working Papers 2013-42, University of Paris West - Nanterre la Défense, EconomiX.

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