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Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?

  • Cécile Couharde
  • Issiaka Coulibaly
  • David Guerreiro
  • Valérie Mignon

This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole?compared to other SSA countries?as well as in each of its ember countries.

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Paper provided by CEPII research center in its series Working Papers with number 2012-13.

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Date of creation: Jun 2012
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Handle: RePEc:cii:cepidt:2012-13
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  3. Yasser Abdih & Charalambos Tsangarides, 2010. "FEER for the CFA franc," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2009-2029.
  4. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
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  8. 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.
  9. Cécile Couharde & Issiaka Coulibaly & Olivier Damette, 2011. "Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone," EconomiX Working Papers 2011-28, University of Paris West - Nanterre la Défense, EconomiX.
  10. Pesaran, M.H., 2004. "‘General Diagnostic Tests for Cross Section Dependence in Panels’," Cambridge Working Papers in Economics 0435, Faculty of Economics, University of Cambridge.
  11. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2013. "On Currency Misalignments within the Euro Area," Review of International Economics, Wiley Blackwell, vol. 21(1), pages 35-48, 02.
  12. Raimundo Soto & Ibrahim A. Elbadawi, 2007. "Theory and Empirics of Real Exchange Rates in Developing Countries," Documentos de Trabajo 324, Instituto de Economia. Pontificia Universidad Católica de Chile..
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  14. David Fielding & Kevin Lee & Kalvinder Shields, 2012. "Does one size fit all? Modelling macroeconomic linkages in the West African Economic and Monetary Union," Economic Change and Restructuring, Springer, vol. 45(1), pages 45-70, February.
  15. Fielding, David & Shields, Kalvinder, 2001. "Modelling macroeconomic shocks in the CFA Franc Zone," Journal of Development Economics, Elsevier, vol. 66(1), pages 199-223, October.
  16. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2008. "Do Terms of Trade Drive Real Exchange Rates? Comparing Oil and Commodity Currencies," Working Papers 2008-32, CEPII research center.
  17. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 409-436.
  18. Agnès Bénassy-Quéré & Maylis Coupet, 2005. "On the Adequacy of Monetary Arrangements in Sub-Saharan Africa," The World Economy, Wiley Blackwell, vol. 28(3), pages 349-373, 03.
  19. Etienne B. Yehoue, 2006. "The CFA Arrangements: More Than Just an Aid Substitute?," Economie Internationale, CEPII research center, issue 107, pages 107-133.
  20. Coleman, Simeon, 2004. "An Aggregate View of Macroeconomic Shocks in Sub-Saharan Africa: A Comparative Study Using Innovation Accounting," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  21. Yin-wong Cheung & Kon S. Lai, 2007. "Nominal Exchange Rate Flexibility and Real Exchange Rate Adjustment: New Evidence from Dual Exchange Rates in Developing Countries," Working Papers 092007, Hong Kong Institute for Monetary Research.
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  23. Michel Galy & Michael T. Hadjimichael, 1997. "The CFA Franc Zone and the EMU," IMF Working Papers 97/156, International Monetary Fund.
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  28. repec:ebl:ecbull:v:6:y:2008:i:12:p:1-10 is not listed on IDEAS
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  31. Zhao, Xiaodan & Kim, Yoonbai, 2009. "Is the CFA Franc Zone an Optimum Currency Area?," World Development, Elsevier, vol. 37(12), pages 1877-1886, December.
  32. De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
  33. Simeon Coleman, 2008. "Estimating Equilibrium Real Exchange Rates in the Franc Zone," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 17(4), pages 600-634, August.
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