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The CFA Arrangements-More than Just an Aid Substitute?

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  • Etienne B. Yehoue
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    Abstract

    The CFA franc zone has had one of the longest experiences with a fixed exchange rate for a convertible currency and regional integration of any group of developing countries. France, the anchor country, provides aid to support the zone. This paper asks whether the arrangements are more than just an aid substitute. The paper addresses this issue by evaluating the overall performance of the zone over the period 1960-2004. The analysis reveals that when the zone is hit by a negative shock, France increases its aid, thereby acting as a shock absorber. However, it also finds that the zone displays strong performance in two areas-price stability and fiscal policy. Thus the paper concludes that the arrangements are not an aid substitute; they have real macroeconomic value for the zone and complement aid.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 07/19.

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    Length: 32
    Date of creation: 01 Jan 2007
    Date of revision:
    Handle: RePEc:imf:imfwpa:07/19

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    Related research

    Keywords: Trade; Risk management; Price stabilization; International cooperation;

    This paper has been announced in the following NEP Reports:

    References

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    1. Tornell, Aaron & Velasco, Andres, 1995. "Fixed Versus Flexible Exchange Rates: Which Provides More Fiscal Discipline," Working Papers 95-06, C.V. Starr Center for Applied Economics, New York University.
    2. Benjamin J. Cohen, 1993. "Beyond Emu: The Problem Of Sustainability," Economics and Politics, Wiley Blackwell, vol. 5(2), pages 187-203, 07.
    3. Rose, Andrew, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," Seminar Papers 678, Stockholm University, Institute for International Economic Studies.
    4. Sachs, Jeffrey & Sala-i-Martin, Xavier, 1992. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States," CEPR Discussion Papers 632, C.E.P.R. Discussion Papers.
    5. Williamson, John, 1982. "A survey of the literature on the optimal peg," Journal of Development Economics, Elsevier, vol. 11(1), pages 39-61, August.
    6. Paul Masson & Catherine Pattillo, 2002. "Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies?," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 11(3), pages 387-412, September.
    7. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
    8. Paul R. Masson & Morris Goldstein & Jacob A. Frenkel, 1991. "Characteristics of a Successful Exchange Rate System," IMF Occasional Papers 82, International Monetary Fund.
    9. Kalemli-Ozcan, Sebnem & Sorensen, Bent E & Yosha, Oved, 2004. "Asymmetric Shocks and Risk Sharing in a Monetary Union: Updated Evidence and Policy Implications for Europe," CEPR Discussion Papers 4463, C.E.P.R. Discussion Papers.
    10. Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers 2631, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Carsten Hefeker, 2010. "Fiscal reform and monetary union in West Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 22(1), pages 86-102.

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