Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa
AbstractWe develop a simple formal framework to clarify the trade-offs involved in the choice between a fixed and flexible exchange-rate system. We then apply the framework to the CFA Zone countries in Africa, which have maintained a fixed parity with the French Franc since independence. Thanks to the predominance of a few agricultural products and natural resources in their exports, CFA member countries have suffered frequent shocks in their terms of trade. A flexible exchange rate could have possibly alleviated the costs of these external shocks. On the other hand, CFA member countries have managed to maintain lower inflation levels than their neighbors. Our framework provides a way of weighing these costs and benefits. The inflation differential between CFA and non-CFA African countries has been around 14 percentage points. We attribute this differential to the standard time-consistency problem inherent in discretionary macroeconomic policy. Nonetheless, our highly stylized calculations suggest that fixed exchange rates have been, on the whole, a bad bargain for the CFA member countries. Under reasonable output-inflation tradeoffs, the output costs of maintaining a fixed exchange rate have outweighed the benefits of lower inflation.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3727.
Date of creation: Jun 1991
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Devarajan, Shantayanan & Rodrik, Dani, 1991. "Do the benefits of fixed exchange rates outweigh their costs? The Franc Zone in Africa," Policy Research Working Paper Series 777, The World Bank.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
- 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.
- Corden, W. Max, 1990. "Exchange rate policy in developing countries," Policy Research Working Paper Series 412, The World Bank.
- 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.
- Fischer, Stanley, 1990. "Rules versus discretion in monetary policy," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 21, pages 1155-1184 Elsevier.
- Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries: Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
- Devarajan, Shantayanan & de Melo, Jaime, 1990. "Membership in the CFA zone : Odyssean journey or Trojan horse?," Policy Research Working Paper Series 482, The World Bank.
- Sebastian Edwards & Fernando J. Losada, 1994. "Fixed Exchange Rates, Inflation and Macroeconomic Discipline," NBER Working Papers 4661, National Bureau of Economic Research, Inc.
- Tornell, Aaron & Velasco, Andres, 2000.
"Fixed versus flexible exchange rates: Which provides more fiscal discipline?,"
Journal of Monetary Economics,
Elsevier, vol. 45(2), pages 399-436, April.
- 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.
- Aaron Tornell & Andres Velasco, 1995. "Fixed versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?," NBER Working Papers 5108, National Bureau of Economic Research, Inc.
- Chantal Dupasquier & Patrick N. Osakwe & Shandre M. Thangavelu, 2005. "Choice of Monetary and Exchange Regimes in ECOWAS : An Optimum Currency Area Analysis," Macroeconomics Working Papers 22570, East Asian Bureau of Economic Research.
- Chris Canavan & Mariano Tommasi, 1997. "Visibility and Credibility in the Political Economy of Reform," Boston College Working Papers in Economics 346., Boston College Department of Economics.
- Giorgio Barba Navaretti & Riccardo Faini & Bernard Gauthier, 2006.
"The Impact of Trade Liberalization on Enterprises in Small Backward Economies: the Case of Chad and Gabon,"
Review of Development Economics,
Wiley Blackwell, vol. 10(3), pages 452-465, 08.
- Giorgio Barba Navaretti & Riccardo Faini & Bernard Gauthier, 2003. "The Impact of Trade Liberalisation on Enterprises in Small Backward Economies: The Case of Chad and Gabon," Development Working Papers 176, Centro Studi Luca d\'Agliano, University of Milano.
- Giorgio Barba Navaretti & Ricardo Faini & Bernard Gauthier, 2002. "The Impact of Trade Liberalisation on Enterprises in Small Backward Economies: The Case of Chad and Gabon," Cahiers de recherche 02-05, HEC Montréal, Institut d'économie appliquée.
- Magazzino, Cosimo, 2012. "Revenue and expenditure nexus: A case study of ECOWAS," Economics Discussion Papers 2012-57, Kiel Institute for the World Economy.
- Mahvash Saeed Qureshi & Charalambos G. Tsangarides, 2006.
"What is Fuzzy About Clustering in West Africa?,"
IMF Working Papers
06/90, International Monetary Fund.
- Tsangarides, Charalambos G. & Qureshi, Mahvash Saeed, 2008. "Monetary Union Membership in West Africa: A Cluster Analysis," World Development, Elsevier, vol. 36(7), pages 1261-1279, July.
- Sebastian Edwards, 1993. "Exchange Rates, Inflation and Disinflation: Latin American Experiences," NBER Working Papers 4320, National Bureau of Economic Research, Inc.
- Rama, Martin, 1998. "Wage misalignment in CFA countries: are labor market policies to blame?," Policy Research Working Paper Series 1873, The World Bank.
- Kuikeu, Oscar, 2011.
"Arguments contre la zone franc
[Against the cfa franc zone]," MPRA Paper 33710, University Library of Munich, Germany.
- Tornell, Aaron & Velasco, Andres, 1995. "Fiscal discipline and the choice of exchange rate regime," European Economic Review, Elsevier, vol. 39(3-4), pages 759-770, April.
- Azam, Jean-Paul, 2003.
"Poverty and Growth in the WAEMU after the 1994 Devaluation,"
IDEI Working Papers
197, Institut d'Économie Industrielle (IDEI), Toulouse.
- Jean-Paul Azam, 2004. "Poverty and Growth in the WAEMU after the 1994 Devaluation," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 13(4), pages 536-562, December.
- Azam, Jean-Paul, 2004. "Poverty and Growth in the WAEMU after the 1994 Devaluation," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
- Aaron Tornell & Andrés Velasco, 1994. "Fiscal Discipline and the Choice of Exchange Rate Regime," Research Department Publications 4004, Inter-American Development Bank, Research Department.
- Aaron Tornell & Andrés Velasco, 1994. "La disciplina fiscal y la elección de régimen cambiario," Research Department Publications 4005, Inter-American Development Bank, Research Department.
- Sebastian Edwards, 1992. "Exchange Rates as Nominal Anchors," NBER Working Papers 4246, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.