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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 member countries.

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File URL: http://economix.fr/pdf/dt/2012/WP_EcoX_2012-34.pdf
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Paper provided by University of Paris West - Nanterre la Défense, EconomiX in its series EconomiX Working Papers with number 2012-34.

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Length: 29 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:drm:wpaper:2012-34
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  1. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2012. "On currency misalignments within the euro area," Working Papers 2012-07, CEPII research center.
  2. Josep Lluis Carrion Silvestre & Tomas del Barrio Castro & Enrique Lopez Bazo, 2003. "Breaking the panels. An application to the GDP per capita," Working Papers in Economics 97, Universitat de Barcelona. Espai de Recerca en Economia.
  3. Christophe Hurlin & Valérie Mignon, 2007. "Second Generation Panel Unit Root Tests," Working Papers halshs-00159842, HAL.
  4. Paul Grauwe, 1996. "The economics of convergence: Towards monetary union in Europe," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(1), pages 1-27, March.
  5. 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).
  6. David Fielding & Kalvinder Shields, 2000. "Modeling Macroeconomic Shocks in the CFA Franc Zone," Discussion Papers in Economics 00/7, Department of Economics, University of Leicester.
  7. 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.
  8. Joakim Westerlund, 2005. "New Simple Tests for Panel Cointegration," Econometric Reviews, Taylor & Francis Journals, vol. 24(3), pages 297-316.
  9. De Grauwe, Paul, 2011. "Governance of a Fragile Eurozone," CEPS Papers 5523, Centre for European Policy Studies.
  10. 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..
  11. Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
  12. Qureshi, Mahvash Saeed & Tsangarides, Charalambos G., 2012. "Hard or Soft Pegs? Choice of Exchange Rate Regime and Trade in Africa," World Development, Elsevier, vol. 40(4), pages 667-680.
  13. Shantayanan Devarajan & Dani Rodrik, 1991. "Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa," NBER Working Papers 3727, National Bureau of Economic Research, Inc.
  14. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc.
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  16. Basher, Syed A. & Westerlund, Joakim, 2008. "Panel Cointegration and the Monetary Exchange Rate Model," MPRA Paper 10453, University Library of Munich, Germany.
  17. Yasser Abdih & Charalambos Tsangarides, 2010. "FEER for the CFA franc," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2009-2029.
  18. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers 5644, C.E.P.R. Discussion Papers.
  19. Michel Galy & Michael T. Hadjimichael, 1997. "The CFA Franc Zone and the EMU," IMF Working Papers 97/156, International Monetary Fund.
  20. 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.
  21. Elbadawi, Ibrahim & Majd, Nader, 1996. "Adjustment and economic performance under a fixed exchange rate: A comparative analysis of the CFA zone," World Development, Elsevier, vol. 24(5), pages 939-951, May.
  22. 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.
  23. Simeon Coleman, 2008. "Inflation persistence in the Franc Zone: evidence from disaggregated prices," Working Papers 2008/16, Nottingham Trent University, Nottingham Business School, Economics Division.
  24. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
  25. 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.
  26. Charalambos Tsangarides & Pierre Ewenczyk & Michal Hulej & Mahvash Saeed Qureshi, 2009. "Are Africa's Currency Unions Good for Trade?," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 876-918, November.
  27. Etienne B. Yehoue, 2006. "The CFA Arrangements: More Than Just an Aid Substitute?," Economie Internationale, CEPII research center, issue 107, pages 107-133.
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  30. repec:ebl:ecbull:v:6:y:2008:i:12:p:1-10 is not listed on IDEAS
  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. 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.
  33. Charalambos G. Tsangarides & Yasser Abdih, 2006. "FEER for the CFA Franc," IMF Working Papers 06/236, International Monetary Fund.
  34. Broda, Christian, 2004. "Terms of trade and exchange rate regimes in developing countries," Journal of International Economics, Elsevier, vol. 63(1), pages 31-58, May.
  35. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
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