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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.

Suggested Citation

  • Honohan, Patrick, 1990. "Price and monetary convergence in currency unions : the Franc and Rand zones," Policy Research Working Paper Series 390, The World Bank.
  • Handle: RePEc:wbk:wbrwps:390

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    References listed on IDEAS

    1. Dornbusch, Rudiger, 1982. "Consumption opportunities and the real value of the external debt," Journal of Development Economics, Elsevier, vol. 10(1), pages 93-101, February.
    2. Wheeler, David, 1984. "Sources of stagnation in sub-Saharan Africa," World Development, Elsevier, vol. 12(1), pages 1-23, January.
    3. Rudiger Dornbusch & Stanley Fischer, 1986. "Stopping hyperinflations past and present," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 122(1), pages 1-47, March.
    4. Lal, Deepak, 1987. "The Political Economy of Economic Liberalization," World Bank Economic Review, World Bank Group, vol. 1(2), pages 273-299, January.
    5. Tanzi, Vito, 1982. "Fiscal disequilibrium in developing countries," World Development, Elsevier, vol. 10(12), pages 1069-1082, December.
    6. Devarajan, Shantayanan & de Melo, Jaime, 1987. "Evaluating participation in African monetary unions: A statistical analysis of the CFA Zones," World Development, Elsevier, vol. 15(4), pages 483-496, April.
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    Cited by:

    1. Savvides, Andreas, 1998. "Inflation and monetary policy in selected West and Central African countries," World Development, Elsevier, vol. 26(5), pages 809-827, May.
    2. Iyabo Masha & Leighton S Harris & Jian-Ye Wang & Kazuko Shirono, 2007. "The Common Monetary Area in Southern Africa; Shocks, Adjustment, and Policy Challenges," IMF Working Papers 07/158, International Monetary Fund.
    3. Elbadawi, Ibrahim & Majd, Nader, 1996. "Adjustment and economic performance under a fixed exchange rate: A comparative analysis of the CFA zone," World Development, Elsevier, vol. 24(5), pages 939-951, May.
    4. Boccara, Bruno & Devarajan, Shantayanan, 1993. "Determinants of inflation among franc zone countries in Africa," Policy Research Working Paper Series 1197, The World Bank.
    5. Chhibber, Ajay, 1991. "Africa's rising inflation : causes, consequences, and cures," Policy Research Working Paper Series 577, The World Bank.
    6. Giorgioni, Gianluigi & Holden, Ken, 2002. "The crisis of the CFA Franc zone: the case of Cote d'Ivoire," Economic Modelling, Elsevier, vol. 19(4), pages 531-564, August.
    7. Elbadawi, Ibrahim & Majd, Nader, 1992. "Fixed parity of the exchange rate and economic performance in the CFA zone : a comparative study," Policy Research Working Paper Series 830, The World Bank.
    8. Chamley, Christophe & Honohan, Patrick, 1990. "Taxation of financial intermediation : measurement principles and application to five African countries," Policy Research Working Paper Series 421, The World Bank.


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