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Price and monetary convergence in currency unions : the Franc and Rand zones

  • Honohan, Patrick

Theory suggests that a currency union will impose significant macroeconomic disciplines on its members. This paper examines the two main surviving currency zones - the franc and rand zones in Africa - to learn whether and to what extent certain generally accepted theory is confirmed by the data. As with most fixed exchange rate systems, the African currency unions have a dominant or"core"member - France in the franc zone and the Republic of South Africa in the rand zone. This report focuses on the small members at the periphery, for whom inflation and interest rates are assumed to be imported from the core. On the whole, the facts support the following generally accepted theory. Price levels converge, at least for tradable goods. The pattern of consumer price inflation is determined largely by core country inflation in the long run, although convergence is slow. The limited evidence available suggests that uncontrolled interest rates also converge to core country levels. Finally, in most cases expansion of domestic credit in one small country spills over into its balance of payments rather than generating local inflation.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 390.

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Date of creation: 31 Mar 1990
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Handle: RePEc:wbk:wbrwps:390
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