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Monetary Policy, Credibility and Asymmetries : Small African Countries and the EMU Advent

  • Andre, Nyembwe

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

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    As a country sets a pig of its currency, the monetary policy credibility it expects to gain implies that the anti-inflationary performance has to be as similar as possible to the anchor country one. Failing to attain this goal can lead to speculative attacks against the currency parity. This is an insight from models of credibility in monetary policy through fixed exchange rates regimes. In addition, multiple equilibria embedded in these models may cause speculative attacks rendering the efficiency of exchange rate regimes questionable. Contrary to this theoretical insight, the franc zone continues to work despite the disinflation process in the European Union that is likely to increase the level of constraint related the use of the euro as an anchor. In this paper, we show how the existence of particular arrangements in the Franc zone allows for getting a framework without multiple equilibria and insures the stability of the system. Moreover, we introduce two kinds of structural asymmetries relative to African economies to show that without the “operations account” mechanismn, the EMU advent is likely to have increased the constraint related to a peg on the euro, leading to a more restraining peg

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    Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2003011.

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    Length: 32
    Date of creation: 01 Jul 2003
    Date of revision: 06 Aug 2002
    Handle: RePEc:ctl:louvir:2003011
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    1. Obstfeld, Maurice, 1991. "Destabilizing Effects of Exchange-Rate Escape Clauses," CEPR Discussion Papers 518, C.E.P.R. Discussion Papers.
    2. Daniel, Betty C, 2001. "A Fiscal Theory of Currency Crises," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 969-88, November.
    3. Catherine A. Pattillo & Paul R. Masson, 2001. "Monetary Union in West Africa; An Agency of Restraint for Fiscal Policies," IMF Working Papers 01/34, International Monetary Fund.
    4. Catherine A. Pattillo & Paul R. Masson, 2001. "Monetary Union in West Africa (ECOWAS)," IMF Occasional Papers 204, International Monetary Fund.
    5. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    6. Guillaumont, Patrick & Jeanneney, Sylviane Guillaumont & Brun, Jean-Francois, 1999. "How Instability Lowers African Growth," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 8(1), pages 87-107, March.
    7. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
    8. Fosu, Augustin Kwasi, 1992. "Political Instability and Economic Growth: Evidence from Sub-Saharan Africa," Economic Development and Cultural Change, University of Chicago Press, vol. 40(4), pages 829-41, July.
    9. Tornell, Aaron & Velasco, Andres, 1995. "Fixed Versus Flexible Exchange Rates: Which Provides More Fiscal Discipline," Working Papers 95-06, C.V. Starr Center for Applied Economics, New York University.
    10. repec:van:wpaper:0128 is not listed on IDEAS
    11. Barro, R.J., 1989. "Economic Growth In A Cross Section Of Countries," RCER Working Papers 201, University of Rochester - Center for Economic Research (RCER).
    12. Guillaume, Dominique M. & Stasavage, David, 2000. "Improving Policy Credibility: Is There a Case for African Monetary Unions?," World Development, Elsevier, vol. 28(8), pages 1391-1407, August.
    13. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
    14. Hughes Hallett, Andrew & Weymark, Diana, 2002. "The Cost of Heterogeneity in a Monetary Union," CEPR Discussion Papers 3223, C.E.P.R. Discussion Papers.
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