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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. Mahvash Saeed Qureshi & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and Trade: Is Africa Different?," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
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  11. Coleman, Simeon, 2010. "Inflation persistence in the Franc zone: Evidence from disaggregated prices," Journal of Macroeconomics, Elsevier, vol. 32(1), pages 426-442, March.
  12. Josep Lluís Carrion-i-Silvestre & Tomás del Barrio-Castro & Enrique López-Bazo, 2005. "Breaking the panels: An application to the GDP per capita," Econometrics Journal, Royal Economic Society, vol. 8(2), pages 159-175, 07.
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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. 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.
  18. Agnès Bénassy-Quéré & Maylis Coupet, 2003. "On the Adequacy of Monetary Arrangements in Sub-Saharian Africa," Working Papers 2003-11, CEPII research center.
  19. 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.
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  24. 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.
  25. 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.
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  33. 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).
  34. Zhao, Xiaodan & Kim, Yoonbai, 2009. "Is the CFA Franc Zone an Optimum Currency Area?," World Development, Elsevier, vol. 37(12), pages 1877-1886, December.
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