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Macroeconomic Convergence in Southern Africa: The Rand Zone Experience

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  • Martin Grandes

Abstract

In this paper we aim to answer the following two questions: 1) has the Common Monetary Area in Southern Africa (henceforth CMA) ever been an optimal currency area (OCA)? 2) What are the costs and benefits of the CMA for its participating countries? In order to answer these questions, we carry out a two-step econometric exercise based on the theory of generalised purchasing power parity (G-PPP). The econometric evidence shows that the CMA (but also Botswana as a de facto member) form an OCA given the existence of common long-run trends in their bilateral real exchange rates. Second, we also test that in the case of the CMA and Botswana the smoothness of the operation of the common currency area — measured through the degree of relative price correlation — depends on a variety of factors. These factors signal both the advantages and disadvantages of joining a monetary union. On the one hand, the more open and more similarly diversified the economies are, the higher the benefits they ... Ce Document de travail s'efforce de répondre à deux questions : 1) la zone monétaire commune de l'Afrique australe (Common Monetary Area - CMA) a-t-elle vraiment réussi à devenir une zone monétaire optimale ? 2) quels sont les coûts et les avantages de la CMA pour les pays participants ? Nous avons effectué un exercice économétrique en deux étapes basé sur la théorie des parités de pouvoir d'achat généralisées. D'après les résultats économétriques, la CMA (avec le Botswana comme membre de facto) est effectivement une zone monétaire optimale étant donné les évolutions communes sur le long terme de leurs taux de change bilatéraux. Nous avons également mis en évidence que le bon fonctionnement de l'union monétaire — mesuré par le degré de corrélation des prix relatifs — dépend de plusieurs facteurs. Ces derniers révèlent à la fois les coûts et les avantages de l'appartenance à une union monétaire. D'un côté, plus les économies sont ouvertes et diversifiées de façon comparable, plus ...

Suggested Citation

  • Martin Grandes, 2003. "Macroeconomic Convergence in Southern Africa: The Rand Zone Experience," OECD Development Centre Working Papers 231, OECD Publishing.
    • Handle: RePEc:oec:devaaa:231-en
    DOI: 10.1787/731274772335
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    Cited by:

    1. Wörgötter, Andreas & Brixiova, Zuzana, 2020. "Monetary Unions of Small Currencies and a Dominating Member: What Policies Work Best for Benefiting from the CMA?," IZA Policy Papers 163, Institute of Labor Economics (IZA).
    2. Thierry Mayer, 2006. "Policy Coherence for Development : A Background paper on Foreign Direct Investment," SciencePo Working papers Main hal-01065640, HAL.
    3. George S. Tavlas, 2009. "The Benefits And Costs Of Monetary Union In Southern Africa: A Critical Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 1-43, February.
    4. Kohnert, Dirk, 2005. "African Monetary Unions - Dominated by the North? On the Relevance of Rational Economic Reasoning Under African Conditions," MPRA Paper 82083, University Library of Munich, Germany.
    5. Abban, Stanley, 2020. "The Prospect of the Proposed Currency Union on Intra-regional Trade: Southern African Customs Union," MPRA Paper 103123, University Library of Munich, Germany.
    6. repec:hal:wpspec:info:hdl:2441/10184 is not listed on IDEAS
    7. Mulatu F. Zerihun & Marthinus C. Breitenbach & Francis Kemegue, 2014. "A Greek Wedding In SADC? Testing For Structural Symmetry Towards SADC Monetary Integration," The African Finance Journal, Africagrowth Institute, vol. 16(2), pages 16-33.
    8. João Loureiro & Evaldo Baptista, 2021. "A single currency for the Economic Community of West Africa? An economic assessment," South African Journal of Economics, Economic Society of South Africa, vol. 89(4), pages 608-634, December.
    9. repec:spo:wpecon:info:hdl:2441/10184 is not listed on IDEAS
    10. repec:spo:wpmain:info:hdl:2441/10184 is not listed on IDEAS
    11. Richard Pomfret, 2003. "Formation and Dissolution of Monetary Unions: Evidence from Europe, and Lessons for Elsewhere," School of Economics and Public Policy Working Papers 2003-03, University of Adelaide, School of Economics and Public Policy.
    12. Steven K. Buigut & Neven T. Valev, 2006. "Eastern and Southern Africa Monetary Integration: A Structural Vector Autoregression Analysis," Review of Development Economics, Wiley Blackwell, vol. 10(4), pages 586-603, November.
    13. Meshach Jesse Aziakpono, 2008. "Financial And Monetary Autonomy And Interdependence Between South Africa And The Other Sacu Countries," South African Journal of Economics, Economic Society of South Africa, vol. 76(2), pages 189-211, June.
    14. Ms. Iyabo Masha & Mr. Leighton S Harris & Mr. Jian-Ye Wang & Ms. Kazuko Shirono, 2007. "The Common Monetary Area in Southern Africa: Shocks, Adjustment, and Policy Challenges," IMF Working Papers 2007/158, International Monetary Fund.
    15. repec:hal:spmain:info:hdl:2441/10184 is not listed on IDEAS

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