The Benefits and Costs of Monetary Union in Southern Africa A Critical Survey of the Literature

With the 14 members of the Southern African Development Community (SADC) having set the objective of a common currency for the year 2016, an expanding empirical literature has emerged evaluating the benefits and costs of such a currency. This paper reviews that literature, focusing on two categories of studies: (1) those that assume that a countrys characteristics are invariant to the adoption of a common currency; and, (2) those that assume that a monetary union alters an economys structure, resulting in trade creation and credibility gains. The literature review suggests that a relative-small group of countries, typically including South Africa, satisfies the criteria necessary for monetary unification. The literature also suggests that, in a monetary union comprised of all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g., fiscal balances) in the region, the potential losses (i.e., higher inflation) from giving up an existing credible national central bank, relevant for South Africa, could outweigh any potential benefits of trade creation resulting from a common currency.