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Price and monetary convergence in currency unions : the Franc and Rand zones

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  • Honohan, Patrick

Abstract

Theory suggests that a currency union will impose significant macroeconomic disciplines on its members. This paper examines the two main surviving currency zones - the franc and rand zones in Africa - to learn whether and to what extent certain generally accepted theory is confirmed by the data. As with most fixed exchange rate systems, the African currency unions have a dominant or"core"member - France in the franc zone and the Republic of South Africa in the rand zone. This report focuses on the small members at the periphery, for whom inflation and interest rates are assumed to be imported from the core. On the whole, the facts support the following generally accepted theory. Price levels converge, at least for tradable goods. The pattern of consumer price inflation is determined largely by core country inflation in the long run, although convergence is slow. The limited evidence available suggests that uncontrolled interest rates also converge to core country levels. Finally, in most cases expansion of domestic credit in one small country spills over into its balance of payments rather than generating local inflation.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 390.

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Date of creation: 31 Mar 1990
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Handle: RePEc:wbk:wbrwps:390

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Related research

Keywords: Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Insurance&Risk Mitigation; Financial Intermediation;

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Cited by:
  1. 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.
  2. 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.
  3. Chamley, Christophe & Honohan, Patrick, 1990. "Taxation of financial intermediation : measurement principles and application to five African countries," Policy Research Working Paper Series 421, The World Bank.
  4. Elbadawi, Ibrahim & Majd, Nader, 1996. "Adjustment and economic performance under a fixed exchange rate: A comparative analysis of the CFA zone," World Development, Elsevier, vol. 24(5), pages 939-951, May.
  5. Savvides, Andreas, 1998. "Inflation and monetary policy in selected West and Central African countries," World Development, Elsevier, vol. 26(5), pages 809-827, May.
  6. Chhibber, Ajay, 1991. "Africa's rising inflation : causes, consequences, and cures," Policy Research Working Paper Series 577, The World Bank.
  7. Boccara, Bruno & Devarajan, Shantayanan, 1993. "Determinants of inflation among franc zone countries in Africa," Policy Research Working Paper Series 1197, The World Bank.

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