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Making and breaking monetary policy rules: the experience of African countries

  • Dominique Guillaume and David Stasavage
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    This paper analyses the experience with rule-based monetary policy in African countries which have participated in monetary unions (CFA Franc Zone, Eastern African Currency Board and Rand Monetary Area). We show that African countries have generally lacked the domestic political institutions which would allow individual governments to tie their hands by establishing such rules. Monetary unions have proved to be an alternative possibility for credible commitment to sound macroeconomic policies, but only in cases where exit from a union is made costly by the provision of side-payments (or sanctions) in other areas of regional co-operation, and only when governance structures have been designed so as to maximise chances for the enforcement of monetary rules. We conclude by making suggestions about the design of African monetary unions.

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    File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/9902text.PDF
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    Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/1999-02.

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    Date of creation: 01 Jan 1999
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    Handle: RePEc:oxf:wpaper:wps/1999-02
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    Web page: http://www.economics.ox.ac.uk/
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    1. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
    2. Deaton, Angus & Miller, Ron, 1996. "International Commodity Prices, Macroeconomic Performance and Politics in Sub-Saharan Africa," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 99-191, October.
    3. Sachs, J-D & Warner, A-M, 1996. "Sources of Slow Growth in African Economies," Papers 545, Harvard - Institute for International Development.
    4. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December.
    5. Michael W. Klein & Nancy P. Marion, 1994. "Explaining the Duration of Exchange-Rate Pegs," NBER Working Papers 4651, National Bureau of Economic Research, Inc.
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    7. Atta, J K & Jefferis, K R & Mannathoko, I, 1996. "Small Country Experiences with Exchange Rates and Inflation: The Case of Botswana," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(2), pages 293-326, June.
    8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
    9. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
    10. Tamim Bayoumi & Jonathan David Ostry, 1995. "Macroeconomic Shocks and Trade Flows within Sub-Saharan Africa; Implications for Optimum Currency Arrangements," IMF Working Papers 95/142, International Monetary Fund.
    11. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
    12. Cobham, David & Robson, Peter, 1994. "Monetary integration in Africa: A deliberately European perspective," World Development, Elsevier, vol. 22(3), pages 285-299, March.
    13. Easterly, William & Levine, Ross, 1998. "Troubles with the Neighbours: Africa's Problem, Africa's Opportunity," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 7(1), pages 120-42, March.
    14. 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.
    15. Michel Galy & Michael T. Hadjimichael, 1997. "The CFA Franc Zone and the EMU," IMF Working Papers 97/156, International Monetary Fund.
    16. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
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