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Pegging the future West African single currency in regard to internal/external competitiveness: a counterfactual analysis

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  • Gilles Duffrenot

    ()

  • Kimiko Sugimoto

Abstract

This paper compares different nominal anchors in the case of a fixed exchange rate regime for the future single regional currency of the Economic Community of the West African States (ECOWAS). We study the anchor choice when the countries focus the exchange rate policy to promote internal and external competitiveness. We consider four foreign anchor currencies: the us dollar, the euro, the yen and the yuan. Using a counterfactual analysis, we find little support for a dominant peg in the ECOWAS zone. In attempting to select an anchor currency, as regards internal and external competitiveness, several aspects need to be taken into consideration: the variability of the commodity prices, adverse downward trend movements, the stability of export revenues and the invoicing currency. A discriminating element is the direction toward which the anchor currency moves, while the world price of commodities evolves in the opposite direction. Our simulations show that the countries would not agree on the same anchor if they pursue several goals: maximizing the export revenues, minimizing their variability, stabilizing them and minimizing the real exchange rate misalignments from its fundamental value.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp974.

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Length: pages
Date of creation: 01 Feb 2010
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Handle: RePEc:wdi:papers:2010-974

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Keywords: West Africa; peg; counterfactual analysis; commodity prices;

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