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Working Paper 166 - Misalignment of Real Effective Exchange Rates: When Should the Franc CFA be Devalued Again?

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  • Sosthène Ulrich GNANSOUNOU
  • Audrey Chouchane

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    Abstract

    The main objective of this article is to test the basis of the rumours that have been circulating since late 2011 about the devaluation of the Franc CFA (CFAF). We have used the analyticial framework pioneered by Combes and Plane (2007) and Couharde et al (2011) to calculate the real effective exchange rate and the percentage of the misalignment of the CFAF relative to this equilibrium value. During the period 2001/11, we confirm the trend of the overvaluation of the CFAF which fed the rumours. However, we conclude that there is no reason to proceed with an immediate devaluation of the CFAF because the misalignment is not very significant and the shock could have adverse effects on the economies of the CFAF zone, as was the case in 1994. Furthermore, the trend towards overvaluation is likely to persist, given the poor performance of European economies. This should lead the monetary authorities of the Franc zone to question the future of their fixed exchange rates that bind them to the Euro zone leaving them with an uncertain future. This article recommends the adoption of a fixed exchange rate regime that should be adjustable, based on clear, transparent rules that are known to all in advance.

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    Bibliographic Info

    Paper provided by African Development Bank in its series Working Paper Series with number 445.

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    Date of creation: 26 Feb 2013
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    Handle: RePEc:adb:adbwps:445

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    1. Cécile Couharde & Issiaka Coulibaly & Olivier Damette, 2011. "Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone," EconomiX Working Papers 2011-28, University of Paris West - Nanterre la Défense, EconomiX.
    2. Devarajan, Shantayanan, 1997. "Real Exchange Rate Misalignment in the CFA Zone," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(1), pages 35-53, March.
    3. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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