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The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy

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  • Jian-Ye Wang
  • Nisreen H. Farhan
  • Amar Shanghavi
  • Márcio Valério Ronci
  • Misa Takebe
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    Abstract

    This paper assesses São Tomé and Príncipe''s monetary and exchange rate arrangements in light of the country''s monetary history and the relevant experience of comparable countries in Africa. The study highlights several structural characteristics of São Tomé and Príncipe including its very small size, high degree of openness, extensive use of foreign currencies, and inflexible product and factor markets in the consideration of an appropriate monetary and exchange regime. Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float. The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency. It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/118.

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    Length: 37
    Date of creation: 01 May 2008
    Date of revision:
    Handle: RePEc:imf:imfwpa:08/118

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    Keywords: Exchange rate regimes; Monetary systems; Debt management; Fiscal management; Small states; exchange rate; inflation; monetary union; central bank; monetary policy; exchange rate arrangements; monetary fund; foreign exchange; hard currency; exchange rate regime; flexible exchange rate; official reserves; currency substitution; exchange rate depreciation; real exchange rate; monetary regime; foreign exchange reserves; money supply; monetary unions; exchange reserves; exchange rate arrangement; monetary area; monetary authorities; monetary aggregates; exchange arrangements; exchange rate movements; monetary policy independence; monetary integration; exchange earnings; currency unions; foreign exchange earnings; monetary expansion; exchange rate pass; effective exchange rate; exchange rate risks; exchange rates; currency areas; flexible exchange rate regime; real effective exchange rate; independent monetary policy; monetary authority; exchange rate policies; basket of currencies; exchange rate volatility; monetary policies; monetary regimes; money demand; foreign exchange auctions; fixed exchange rate; flexible exchange rates; exchange rate uncertainty; exchange controls; exchange risks; monetary community; currency basket; alternative exchange rate regimes; alternative exchange rate; nominal exchange rate; currency depreciation; floating exchange rate; government securities; monetary control; foreign exchange law; money market; monetary policy instrument; official exchange rate; exchange rate systems; exchange rate commitment; exchange rate parity; monetary cooperation; stable exchange rate; exchange rate pegs; exchange rate target; exchange auctions; exchange rate peg; parallel exchange rates; currency exchange;

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    1. Bayoumi, Tamim & Ostry, Jonathan D, 1997. "Macroeconomic Shocks and Trade Flows within Sub-Saharan Africa: Implications for Optimum Currency Arrangements," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 412-44, October.
    2. 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.
    3. Jérôme Vacher & Samer Y. Saab, 2007. "Banking Sector Integration and Competition in CEMAC," IMF Working Papers 07/3, International Monetary Fund.
    4. Mathias Hoffmann, 2007. "Fixed versus Flexible Exchange Rates: Evidence from Developing Countries," Economica, London School of Economics and Political Science, vol. 74(295), pages 425-449, 08.
    5. Hoffmann, Mathias, 2003. "Fixed versus Flexible Exchange Rates: Evidence from Developing Countries," Royal Economic Society Annual Conference 2003 109, Royal Economic Society.
    6. Fielding, David & Lee, Kevin & Shields, Kalvinder, 2004. "The Characteristics of Macroeconomic Shocks in the CFA Franc Zone," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    7. Owen F. Humpage & Jean M. McIntire, 1995. "An introduction to currency boards," Economic Review, Federal Reserve Bank of Cleveland, issue Q II, pages 2-11.
    8. Elbadawi, Ibrahim & Majd, Nader, 1992. "Fixed parity of the exchange rate and economic performance in the CFA zone : a comparative study," Policy Research Working Paper Series 830, The World Bank.
    9. Guillaumont, Patrick & Guillaumont, Sylviane & Plane, Patrick, 1988. "Participating in African monetary unions: An alternative evaluation," World Development, Elsevier, vol. 16(5), pages 569-576, May.
    10. Iyabo Masha & Leighton Harris & Jian-Ye Wang & Kazuko Shirono, 2007. "The Common Monetary Area in Southern Africa," IMF Working Papers 07/158, International Monetary Fund.
    11. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
    12. Devarajan, Shantayanan & de Melo, Jaime, 1987. "Evaluating participation in African monetary unions: A statistical analysis of the CFA Zones," World Development, Elsevier, vol. 15(4), pages 483-496, April.
    13. Ilan Goldfajn & Gino Olivares, 2000. "Is adopting Full Dollarization the solution? Looking at the evidence," Textos para discussão 416, Department of Economics PUC-Rio (Brazil).
    14. Amadou N. R. Sy, 2006. "Financial Integration in the West African Economic and Monetary Union," IMF Working Papers 06/214, International Monetary Fund.
    15. Katrin Elborgh-Woytek & Julian Berengaut, 2006. "Beauty Queens and Wallflowers," IMF Working Papers 06/226, International Monetary Fund.
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