IDEAS home Printed from https://ideas.repec.org/p/cii/cepidt/2021-03.html
   My bibliography  Save this paper

On the economic desirability of the West African monetary union: would one currency fit all?

Author

Listed:
  • Cécile Couharde
  • Carl Grekou
  • Valérie Mignon

Abstract

In this paper, we investigate from a policy coordination viewpoint the desirability of the West African monetary union project, ECO. Our approach is built around the inclusion of national objectives in the regional integration perspective. Thanks to cluster analysis, we identify two groups of countries with relatively homogenous sustainable exchange rate paths in West Africa. We also find that no single currency peg nor a freely floating exchange rate regime would be preferable for any of the countries or groups of economies. Overall, our findings argue in favor of two ECOs —at least in a first step, i.e., one for each of the two identified zones. Each ECO would serve as a virtual anchor —with some flexibility— for the considered group, and would be determined by a basket of currencies mainly composed of euro and US dollar.

Suggested Citation

  • Cécile Couharde & Carl Grekou & Valérie Mignon, 2021. "On the economic desirability of the West African monetary union: would one currency fit all?," Working Papers 2021-03, CEPII research center.
    • Handle: RePEc:cii:cepidt:2021-03
    as

    Download full text from publisher

    File URL: http://www.cepii.fr/PDF_PUB/wp/2021/wp2021-03.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    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. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    3. Paul R. Masson, 2006. "New Monetary Unions in Africa: a Major Change in the Monetary Landscape?," Economie Internationale, CEPII research center, issue 107, pages 87-105.
    4. Jeffrey Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 384-416, July.
    5. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(1), pages 230-231, January.
    6. Chrysost Bangaké, 2008. "Exchange Rate Volatility and Optimum Currency Area: Evidence from Africa," Economics Bulletin, AccessEcon, vol. 6(12), pages 1-10.
    7. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, vol. 74(4), pages 967-1012, July.
    8. Tsangarides, Charalambos G. & Qureshi, Mahvash Saeed, 2008. "Monetary Union Membership in West Africa: A Cluster Analysis," World Development, Elsevier, vol. 36(7), pages 1261-1279, July.
    9. Couharde, Cécile & Delatte, Anne-Laure & Grekou, Carl & Mignon, Valérie & Morvillier, Florian, 2018. "EQCHANGE: A world database on actual and equilibrium effective exchange rates," International Economics, Elsevier, vol. 156(C), pages 206-230.
    10. Chrysost Bangake & Jude Eggoh, 2008. "The Impact of Currency Unions on Trade : Lessons from CFA Franc Zone and Implications for proposed African Monetary Unions," Post-Print halshs-00364866, HAL.
    11. Calderon, Cesar & Chong, Alberto & Stein, Ernesto, 2007. "Trade intensity and business cycle synchronization: Are developing countries any different?," Journal of International Economics, Elsevier, vol. 71(1), pages 2-21, March.
    12. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    13. Agnès Bénassy‐Quéré & Maylis Coupet, 2005. "On the Adequacy of Monetary Arrangements in Sub‐Saharan Africa," The World Economy, Wiley Blackwell, vol. 28(3), pages 349-373, March.
    14. Paul de Grauwe & Francesco Paolo Mongelli, 2005. "Endogeneities of Optimum Currency Areas: What brings Countries Sharing a Single Currency Closer together?," Working Papers de Economia (Economics Working Papers) 29, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.
    15. Baxter, Marianne & Kouparitsas, Michael A., 2005. "Determinants of business cycle comovement: a robust analysis," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 113-157, January.
    16. Coudert, Virginie & Couharde, Cécile & Grekou, Carl & Mignon, Valérie, 2020. "Heterogeneity within the euro area: New insights into an old story," Economic Modelling, Elsevier, vol. 90(C), pages 428-444.
    17. de Sousa, José, 2012. "The currency union effect on trade is decreasing over time," Economics Letters, Elsevier, vol. 117(3), pages 917-920.
    18. Houssa, Romain, 2008. "Monetary union in West Africa and asymmetric shocks: A dynamic structural factor model approach," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 319-347, February.
    19. Binder, Michael & Offermanns, Christian J., 2007. "International investment positions and exchange rate dynamics: a dynamic panel analysis," Discussion Paper Series 1: Economic Studies 2007,23, Deutsche Bundesbank.
    20. Schröder, Marcel, 2013. "Should developing countries undervalue their currencies?," Journal of Development Economics, Elsevier, vol. 105(C), pages 140-151.
    21. Torres,Francisco & Giavazzi,Francesco (ed.), 1993. "Adjustment and Growth in the European Monetary Union," Cambridge Books, Cambridge University Press, number 9780521440196, September.
    22. Charles Engel, 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," American Economic Review, American Economic Association, vol. 101(6), pages 2796-2822, October.
    23. Qureshi, Mahvash Saeed & Tsangarides, Charalambos G., 2012. "Hard or Soft Pegs? Choice of Exchange Rate Regime and Trade in Africa," World Development, Elsevier, vol. 40(4), pages 667-680.
    24. Paul R. Masson, 2019. "Currency Unions in Africa: Is the Trade Effect Substantial Enough to Justify Their Formation?," World Scientific Book Chapters, in: Macroeconomic Modelling and Monetary and Exchange Rate Regimes, chapter 7, pages 243-262, World Scientific Publishing Co. Pte. Ltd..
    25. Gilles Dufrénot & Kimiko Sugimoto, 2013. "West African Single Currency and Competitiveness," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 763-777, November.
    26. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(4), pages 876-878, October.
    27. Steven K. Buigut & Neven Valev, 2005. "Eastern and Southern Africa Monetary Integration: A Structural Vector Autoregression Analysis (2005)," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0504, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    28. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, pages 295-333, National Bureau of Economic Research, Inc.
    29. Calista Cheung & Davide Furceri & Elena Rusticelli, 2013. "Structural and Cyclical Factors behind Current Account Balances," Review of International Economics, Wiley Blackwell, vol. 21(5), pages 923-944, November.
    30. Mr. Andrew Berg & Yanliang Miao, 2010. "The Real Exchange Rate and Growth Revisited: The Washington Consensus Strikes Back?," IMF Working Papers 2010/058, International Monetary Fund.
    31. Paul De Grauwe, 2000. "Monetary Policies in the Presence of Asymmetries," Journal of Common Market Studies, Wiley Blackwell, vol. 38(4), pages 593-612, November.
    32. Chuku, Chuku, 2012. "The proposed eco: should West Africa proceed with a common currency?," MPRA Paper 43739, University Library of Munich, Germany.
    33. Ms. Susana Garcia Cervero & J. Humberto Lopez & Mr. Enrique Alberola Ila & Mr. Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates: Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework," IMF Working Papers 1999/175, International Monetary Fund.
    34. George Tavlas, 1994. "The theory of monetary integration," Open Economies Review, Springer, vol. 5(2), pages 211-230, March.
    35. Inklaar, Robert & Jong-A-Pin, Richard & de Haan, Jakob, 2008. "Trade and business cycle synchronization in OECD countries--A re-examination," European Economic Review, Elsevier, vol. 52(4), pages 646-666, May.
    36. Willem H. Buiter, 2000. "Optimal Currency Areas Scottish Economic Society/Royal Bank of Scotland Annual Lecture, 1999," Scottish Journal of Political Economy, Scottish Economic Society, vol. 47(3), pages 213-250, August.
    37. Holtemöller, Oliver & Mallick, Sushanta, 2013. "Exchange rate regime, real misalignment and currency crises," Economic Modelling, Elsevier, vol. 34(C), pages 5-14.
    38. Alagidede, Paul & Coleman, Simeon & Cuestas, Juan Carlos, 2012. "Inflationary shocks and common economic trends: Implications for West African monetary union membership," Journal of Policy Modeling, Elsevier, vol. 34(3), pages 460-475.
    39. Mr. Etienne B Yehoue, 2005. "On the Pattern of Currency Blocs in Africa," IMF Working Papers 2005/045, International Monetary Fund.
    40. Coulibaly, Issiaka & Gnimassoun, Blaise, 2013. "Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa," Economic Modelling, Elsevier, vol. 32(C), pages 463-482.
    41. Sampawende Jules TAPSOBA, 2009. "Union Monétaire en Afrique de l’Ouest: Quelles Réponses à l’Hétérogénéité des Chocs ?," Working Papers 200912, CERDI.
    42. Adu, Raymond & Litsios, Ioannis & Baimbridge, Mark, 2019. "Real exchange rate and asymmetric shocks in the West African Monetary Zone (WAMZ)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 232-249.
    43. Margarita Rubio & Mariarosaria Comunale, 2017. "Lithuania in the Euro Area: Monetary Transmission and Macroprudential Policies," Eastern European Economics, Taylor & Francis Journals, vol. 55(1), pages 29-49, January.
    44. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
    45. repec:ebl:ecbull:v:6:y:2008:i:12:p:1-10 is not listed on IDEAS
    46. Xavier Debrun & Paul R. Masson & Catherine Pattillo, 2011. "Should African Monetary Unions Be Expanded? An Empirical Investigation of the Scope for Monetary Integration in Sub-Saharan Africa-super- †," Journal of African Economies, Centre for the Study of African Economies, vol. 20(suppl_2), pages -150, May.
    47. Anonymous, 1962. "International Monetary Fund," International Organization, Cambridge University Press, vol. 16(3), pages 619-631, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Adjalala, Frida & Dissou, Yazid, 2023. "Idiosyncratic shocks in a currency union: Insights from West Africa," Economic Modelling, Elsevier, vol. 122(C).
    2. Gandjon Fankem, Gislain Stéphane & Fouda Mbesa, Lucien Cédric, 2023. "Business cycle synchronization and African monetary union: A wavelet analysis," Journal of Macroeconomics, Elsevier, vol. 77(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Carl Grekou & Cécile Couharde & Valérie Mignon, 2021. "On the desirability of the West African monetary union," Working Papers hal-04159755, HAL.
    2. Coudert, Virginie & Couharde, Cécile & Grekou, Carl & Mignon, Valérie, 2020. "Heterogeneity within the euro area: New insights into an old story," Economic Modelling, Elsevier, vol. 90(C), pages 428-444.
    3. Samba Diop & Simplice A. Asongu, 2020. "An Index of African Monetary Integration (IAMI)," Working Papers 20/003, European Xtramile Centre of African Studies (EXCAS).
    4. Simplice Asongu & Jacinta Nwachukwu & Vanessa Tchamyou, 2017. "A Literature Survey On Proposed African Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 878-902, July.
    5. Coulibaly, Issiaka & Gnimassoun, Blaise, 2013. "Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa," Economic Modelling, Elsevier, vol. 32(C), pages 463-482.
    6. Asongu, Simplice A. & Folarin, Oludele E. & Biekpe, Nicholas, 2019. "The long run stability of money demand in the proposed West African monetary union," Research in International Business and Finance, Elsevier, vol. 48(C), pages 483-495.
    7. Simplice Asongu & Jacinta C. Nwachukwu & Vanessa S. Tchamyou, 2017. "A summary of a survey on proposed African monetary unions," Working Papers of the African Governance and Development Institute. 17/008, African Governance and Development Institute..
    8. João Loureiro & Evaldo Baptista, 2021. "A single currency for the Economic Community of West Africa? An economic assessment," South African Journal of Economics, Economic Society of South Africa, vol. 89(4), pages 608-634, December.
    9. Adu, Raymond & Litsios, Ioannis & Baimbridge, Mark, 2019. "Real exchange rate and asymmetric shocks in the West African Monetary Zone (WAMZ)," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 59(C), pages 232-249.
    10. George S. Tavlas, 2009. "The Benefits And Costs Of Monetary Union In Southern Africa: A Critical Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 1-43, February.
    11. Daniel Simons & Rosmy Jean Louis, 2018. "Monetary union in West Africa and business cycles synchronicity: New evidence," The World Economy, Wiley Blackwell, vol. 41(10), pages 2828-2848, October.
    12. Issiaka Coulibaly & Blaise Gnimassoun, 2012. "Optimality of a monetary union : New evidence from exchange rate misalignments in West Africa," Working Papers hal-04141049, HAL.
    13. Zouri, Stéphane, 2020. "Business cycles, bilateral trade and financial integration: Evidence from Economic Community of West African States (ECOWAS)," International Economics, Elsevier, vol. 163(C), pages 25-43.
    14. Zouri, Stéphane, 2019. "Business cycles,bilateral trade and international financial intergration : Evidence from Economic Community of West African States (ECOWAS)," MPRA Paper 98748, University Library of Munich, Germany.
    15. Carl Grekou, 2015. "Currency misalignments and economic growth: the foreign currency-denominated debt channel," EconomiX Working Papers 2015-23, University of Paris Nanterre, EconomiX.
    16. Adu, Raymond & Litsios, Ioannis & Baimbridge, Mark, 2022. "ECOWAS single currency: Prospective effects on trade," Journal of International Money and Finance, Elsevier, vol. 126(C).
    17. Fontana, Giuseppe & Kamara, Mohamed Sheriff Hamid, 2023. "Towards monetary union in the Economic Community of West African States (ECOWAS): Better policy harmonisation and greater intra-trade are needed," Journal of Policy Modeling, Elsevier, vol. 45(1), pages 58-73.
    18. Zouri, Stéphane, 2019. "Business cycles,bilateral trade and international financial intergration : Evidence from Economic Community of West African States (ECOWAS)," MPRA Paper 95275, University Library of Munich, Germany.
    19. Claire Giordano, 2021. "How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(3), pages 365-404, July.
    20. Mattera, Raffaele & Franses, Philip Hans, 2023. "Are African business cycles synchronized? Evidence from spatio-temporal modeling," Economic Modelling, Elsevier, vol. 128(C).

    More about this item

    Keywords

    Monetary integration; West Africa; CFA franc zone; ECOWAS;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cii:cepidt:2021-03. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/cepiifr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.