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Does a free trade area favors an optimum currency area? The Case of Morocco and the European Union

Author

Listed:
  • Lahcen ACHY

    (INSEA, Rabat, Morocco)

  • Juliette Milgram

    (Grenade University, Spain)

Abstract

The purpose of this paper is to investigate simultaneously the potential effects of European Union's Association Agreement with Morocco and the adoption of the Euro as a single currency on exchange rate regime of Moroccan Dirham. Since Morocco depends heavily on EU as a market for its exports and a source for its imports, limited variability of the DH against the Euro seems à priori, to be an appropriate policy option. This option may even be strengthened within the FTA. However, the nature and the composition of Moroccan exports are typical of North-South trade with little diversification and high concentration on textiles and agricultural products. From this perspective, the risk of asymmetric shocks is more likely, which reduces the expected gains from nominal anchorage. This paper aims at contributing to the future exchange rate regime in Morocco and focuses on three main issues. The first issue is to investigate the potential effects of the FTA on trade structure and industrial specialization in Morocco. To this end, a computable general equilibrium model is used to simulate macroeconomic and sectoral effects of the implementation of the FTA on industrial sector. The second issue is to estimate the real exchange rate equilibrium based on macroeconomic fundamentals and assess the degree of misalignment of the actual value of the Dirham. Finally, the question of exchange rate arrangement is examined by combining the expected effects of free trade area between Morocco and the European Union, the existing degree of misalignment of the Dirham, and considering the adoption of the Euro as a single currency in 12 European countries. Our results seem to suggest that the implementation of a FTA may lead to a reallocation of industrial production toward an even more specialization in labor-intensive products. Under such circumstances, the symmetry of shocks, as an important condition for anchoring the DH to the Euro, is not satisfied making this option non-desirable.

Suggested Citation

  • Lahcen ACHY & Juliette Milgram, 2005. "Does a free trade area favors an optimum currency area? The Case of Morocco and the European Union," International Trade 0512012, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpit:0512012
    Note: Type of Document - pdf; pages: 18. Free Trade Area and Currency Union
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/it/papers/0512/0512012.pdf
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    References listed on IDEAS

    as
    1. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-1025, July.
    2. de Melo, Jaime, 1988. "Computable general equilibrium models for trade policy analysis in developing countries: A survey," Journal of Policy Modeling, Elsevier, vol. 10(4), pages 469-503.
    3. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
    4. Susan Fennell & Patricia Alonso-Gamo & Khaled Sakr, 1997. "Adjusting to New Realities; MENA, The Uruguay Round, and the EU-Mediterranean Initiative," IMF Working Papers 97/5, International Monetary Fund.
    5. Hoekman, Bernard, 1995. "The WTO, the EU and the Arab World: Trade Policy Priorities and Pitfalls," CEPR Discussion Papers 1226, C.E.P.R. Discussion Papers.
    6. Agnès Bénassy-Quéré & Lionel Fontagné & Amina Lahrèche-Revil, 1999. "Exchange Rate Strategies in the Competition for Attracting FDI," Working Papers 1999-16, CEPII research center.
    7. Shoven,John B. & Whalley,John, 1992. "Applying General Equilibrium," Cambridge Books, Cambridge University Press, number 9780521266550, Fall.
    8. McKenzie, Michael D, 1999. " The Impact of Exchange Rate Volatility on International Trade Flows," Journal of Economic Surveys, Wiley Blackwell, vol. 13(1), pages 71-106, February.
    9. Lionel Fontagné & Michael Freudenberg, 1999. "Endogenous Symmetry of Shocks in a Monetary Union," Open Economies Review, Springer, vol. 10(3), pages 263-287, July.
    10. Lahcen Achy & Khalid Sekkat, 2003. "The European Single Currency and MENA's Exports to Europe," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 563-582, November.
    11. George T. Abed, 1998. "Trade Liberalization and Tax Reform in the Southern Mediterranean Region," IMF Working Papers 98/49, International Monetary Fund.
    12. Achy, Lahcen, 2001. "Equilibrium exchange rate and misalignment In selected MENA countries," MPRA Paper 4799, University Library of Munich, Germany, revised 2001.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Free Trade Area; CGE Model; Exchange rate;

    JEL classification:

    • F1 - International Economics - - Trade
    • F2 - International Economics - - International Factor Movements and International Business

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