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Cape Verde's exchange rate policy and its alternatives

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  • Romain Weber

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    Abstract

    This paper analyses Cape Verde's exchange rate policy and investigates whether viable alternatives exist. Cape Verde currently operates a fixed exchange rate regime which, since 1999, links the national currency to the euro. The fixed exchange rate has many benefits, but authorities have to leave interest rates high in order to attract foreign capital, which has inhibited private investment and economic growth; the appreciation of the euro in 2002 and 2003 put the fixed exchange rate under additional strain. This issue is addressed by contemplating whether interest rates can be reduced in the context of the current exchange rate regime, and what costs and benefits are associated with a regime change that enables a reduction in interest rates. The analysis strongly suggests that it is not so much the exchange rate regime that is to blame for high interest rates, but rather a structural problem in the banking sector. Consequently, the policy conclusion reached in this paper is that although changing the current exchange rate policy might reduce interest rates, structural reforms would be more appropriate to tackle the problem at hand.

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    File URL: http://www.bcl.lu/fr/publications/cahiers_etudes/16/BCLWP016.pdf
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    Bibliographic Info

    Paper provided by Central Bank of Luxembourg in its series BCL working papers with number 16.

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    Length: 67 pages
    Date of creation: Oct 2005
    Date of revision:
    Handle: RePEc:bcl:bclwop:bclwp016

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    Web page: http://www.bcl.lu/

    Related research

    Keywords: Cape Verde; exchange rates; interest rates; central banks and monetary policy; remittances; modern asset market model;

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    Cited by:
    1. Macedo, Jorge Braga de & Pereira, Luis Brites, 2006. "The Credibility of Cabo Verde’s Currency Peg," FEUNL Working Paper Series wp494, Universidade Nova de Lisboa, Faculdade de Economia.

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