Short-term stabilization versus long-term price stability: evaluating Namibia's membership of the Common Monetary Area

It was found in this paper that (i) because of the high degree of openness of the Namibian economy and its small size, the use of nominal exchange rate as an instrument of adjustment will have limited effects; (ii) that the costs associated with the loss of monetary autonomy are small; and (iii) that there exists a wide range of instruments to address the effects of asymmetric shocks, irrespective of loss of nominal exchange rate instrument. For example, adverse shocks to incomes in Namibia can be cushioned by flows of financial capital, which may involve holdings of assets which are claims to outside income streams or financing from the union-wide financial markets. Thus, the diversification of assets afforded by the CMA could provide insurance against purely regional shocks, and could make consumption independent of shocks. Further, there are indications that as the economy continues to diversify, it can cope with exogenous shocks resulting from adverse shocks to one of its export commodities. Most importantly, it was argued that the CMA may lend time consistency and credibility to economic policy management in Namibia. Therefore, pegging to the rand may as well be considered an appropriate exchange rate regime for Namibia. However, if South Africa becomes the source of instability then pegging to the rand will not be advisable.