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Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone

  • Cécile Couharde
  • Issiaka Coulibaly
  • Olivier Damette

In this paper, we analyse currencies' misalignments of the CFA zone countries and the adjustment process of their real effective exchange rates towards their equilibrium level over the period 1985-2007. To this end, we firstly estimate, using panel cointegration techniques, a long term relationship between the real effective exchange rate and economic fundamentals. Secondly, we estimate a panel smooth transition error correction model in order to take into account non linearities in the convergence process of real exchange rates towards their equilibrium level. Two main results emerge from our analysis. Firstly, the real appreciation of effective exchange rates in the CFA zone countries from the 2000s did not translate, in 2007, into a real overvaluation comparable to that occurring before the devaluation of the CFA franc in 1994. However, some countries are exceptions, indicating a strong heterogeneity within the CFA zone. Finally, the convergence process of real effective exchange rates towards their equilibrium level also differs substantially between country groups. These results tend to show the difficulty to apply a single exchange rate policy in the CFA zone and rather call for further coordination and policy harmonization between the countries.

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File URL: http://economix.fr/pdf/dt/2011/WP_EcoX_2011-28.pdf
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2011-28.

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Length: 36 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:drm:wpaper:2011-28
Contact details of provider: Postal: 200 Avenue de la République, Bât. G - 92001 Nanterre Cedex
Web page: http://economix.fr
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