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The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe

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Author Info
Márcio Valério Ronci
Misa Takebe
Nisreen Farhan
Amar Shanghavi
Jian-Ye Wang
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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/118.

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Length: 37 pages
Date of creation: 05 May 2008
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Handle: RePEc:imf:imfwpa:08/118

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Related research
Keywords: Working Paper ; Exchange rate regimes ; São Tomé and Príncipe ; Currencies ; Monetary systems ; Debt management ; Fiscal management ; Small states ;

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  7. Hoffmann, Mathias, 2003. "Fixed versus Flexible Exchange Rates: Evidence from Developing Countries," Royal Economic Society Annual Conference 2003 109, Royal Economic Society. [Downloadable!]
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