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Is the CFA Franc Zone an Optimum Currency Area?

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  • Zhao, Xiaodan
  • Kim, Yoonbai

Abstract

Summary In this paper, we explore the features of the CFA franc zone and compare them to those of the Economic and Monetary Union (EMU) by operationalizing the criteria for an optimum currency area. A structural vector autoregression method is used in modeling national outputs as determined by global, regional, and country-specific shocks. We find that domestic outputs of the CFA franc zone countries are strongly influenced by country-specific shocks while regional shocks are far more important in European countries that have joined the EMU. The results suggest that the CFA franc zone countries are structurally different from each other and thus are more likely to be subjected to asymmetric shocks. They do not appear to form an optimum currency area and the monetary union may have been a costly arrangement for the member countries unless they are compensated with some other benefits.

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  • Zhao, Xiaodan & Kim, Yoonbai, 2009. "Is the CFA Franc Zone an Optimum Currency Area?," World Development, Elsevier, vol. 37(12), pages 1877-1886, December.
    • Handle: RePEc:eee:wdevel:v:37:y:2009:i:12:p:1877-1886
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    2. Asongu, Simplice A. & Folarin, Oludele E. & Biekpe, Nicholas, 2019. "The long run stability of money demand in the proposed West African monetary union," Research in International Business and Finance, Elsevier, vol. 48(C), pages 483-495.
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    4. Couharde, Cécile & Coulibaly, Issiaka & Guerreiro, David & Mignon, Valérie, 2013. "Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 428-441.
    5. Carlos Vieira & Isabel Vieira, 2013. "Monetary Integration In Eastern And Southern Africa: Choosing A Currency Peg For Comesa," South African Journal of Economics, Economic Society of South Africa, vol. 81(3), pages 356-372, September.
    6. Couharde, Cécile & Coulibaly, Issiaka & Damette, Olivier, 2013. "Anchor currency and real exchange rate dynamics in the CFA Franc zone," Economic Modelling, Elsevier, vol. 33(C), pages 722-732.
    7. Abban, Stanley, 2020. "Currency Union as a Panacea for ills in Africa: A New Institutional Framework and Theoretical Consideration," MPRA Paper 105459, University Library of Munich, Germany.
    8. Adu, Raymond & Litsios, Ioannis & Baimbridge, Mark, 2019. "Real exchange rate and asymmetric shocks in the West African Monetary Zone (WAMZ)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 232-249.
    9. León Padilla & Ángel Rodriguez García-Brazales, 2021. "Can South America form an optimal monetary area? A structural vector autoregression analysis," International Economics and Economic Policy, Springer, vol. 18(2), pages 309-329, May.
    10. Reza Moosavi Mohseni & M. Azali, 2014. "Monetary Integration and Optimum Currency Area in ASEAN+3: What We Need for a New Framework?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 277-285.
    11. Aleksandra Ostrowska & Paulina Pukin-Sowul, 2023. "Macroeconomic Stability of Central and Eastern European Countries in the Context of Monetary Integration," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 390-408.
    12. Gilles Duffrenot & Kimiko Sugimoto, 2010. "Pegging the future West African single currency in regard to internal/external competitiveness: a counterfactual analysis," William Davidson Institute Working Papers Series wp974, William Davidson Institute at the University of Michigan.
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