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Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?

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Author Info

  • Cécile Couharde
  • Issiaka Coulibaly
  • David Guerreiro
  • Valérie Mignon

Abstract

This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole—compared to other SSA countries—as well as in each of its member countries.

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Bibliographic Info

Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-34.

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Length: 29 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:drm:wpaper:2012-34

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Keywords: Equilibrium exchange rates; CFA zone; Optimum Currency Areas; currency union sustainability;

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References

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Cited by:
  1. Coulibaly, Issiaka & Gnimassoun, Blaise, 2013. "Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa," Economic Modelling, Elsevier, vol. 32(C), pages 463-482.
  2. 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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