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

    This paper assesses S�o Tom� and Pr�ncipe'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 S�o Tom� and Pr�ncipe 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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    Related research

    Keywords: Exchange rate regimes; Monetary systems; Debt management; Fiscal management; Small states;

    This paper has been announced in the following NEP Reports:

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    1. Xavier Sala-i-Martin & Jeffrey Sachs, 1991. "Fiscal Federalism and Optimum Currency Areas: Evidence for Europe From the United States," NBER Working Papers 3855, National Bureau of Economic Research, Inc.
    2. Saab, Samer & Vacher, Jerome, 2007. "Banking Sector Integration and Competition in CEMAC," MPRA Paper 2011, University Library of Munich, Germany.
    3. Ugo Fasano-Filho & Andrea Schaechter, 2003. "Monetary Union Among Member Countries of the Gulf Cooperation Council," IMF Occasional Papers 223, International Monetary Fund.
    4. 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).
    5. 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.
    6. 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.
    7. 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.
    8. Amadou N. R. Sy, 2006. "Financial Integration in the West African Economic and Monetary Union," IMF Working Papers 06/214, International Monetary Fund.
    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. Tamim Bayoumi & Jonathan David Ostry, 1995. "Macroeconomic Shocks and Trade Flows Within Sub-Saharan Africa: Implications for Optimum Currency Arrangements," IMF Working Papers 95/142, International Monetary Fund.
    11. Iyabo Masha & Leighton Harris & Jian-Ye Wang & Kazuko Shirono, 2007. "The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Challenges," IMF Working Papers 07/158, 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. Hoffmann, Mathias, 2003. "Fixed versus Flexible Exchange Rates: Evidence from Developing Countries," Royal Economic Society Annual Conference 2003 109, Royal Economic Society.
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