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Cape Verde's exchange rate policy and its alternatives

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  • Romain Weber

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Abstract

This paper analyses Cape Verde's exchange rate policy and investigates whether viable alternatives exist. Cape Verde currently operates a fixed exchange rate regime which, since 1999, links the national currency to the euro. The fixed exchange rate has many benefits, but authorities have to leave interest rates high in order to attract foreign capital, which has inhibited private investment and economic growth; the appreciation of the euro in 2002 and 2003 put the fixed exchange rate under additional strain. This issue is addressed by contemplating whether interest rates can be reduced in the context of the current exchange rate regime, and what costs and benefits are associated with a regime change that enables a reduction in interest rates. The analysis strongly suggests that it is not so much the exchange rate regime that is to blame for high interest rates, but rather a structural problem in the banking sector. Consequently, the policy conclusion reached in this paper is that although changing the current exchange rate policy might reduce interest rates, structural reforms would be more appropriate to tackle the problem at hand.

Suggested Citation

  • Romain Weber, 2005. "Cape Verde's exchange rate policy and its alternatives," BCL working papers 16, Central Bank of Luxembourg.
  • Handle: RePEc:bcl:bclwop:bclwp016
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    File URL: http://www.bcl.lu/fr/Recherche/publications/cahiers_etudes/16/BCLWP016.pdf
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    Cited by:

    1. Macedo, Jorge Braga de & Pereira, Luis Brites, 2006. "The Credibility of Cabo Verde’s Currency Peg," FEUNL Working Paper Series wp494, Universidade Nova de Lisboa, Faculdade de Economia.
    2. Jorge Braga de Macedo & Luis Pereira & Afonso Reis, 2009. "Comparing Exchange Market Pressure across Five African Countries," Open Economies Review, Springer, vol. 20(5), pages 645-682, November.

    More about this item

    Keywords

    Cape Verde; exchange rates; interest rates; central banks and monetary policy; remittances; modern asset market model;

    JEL classification:

    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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