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Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?

Author

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  • Cécile Couharde
  • Issiaka Coulibaly
  • David Guerreiro
  • Valérie Mignon

Abstract

This paper aims at explaining why the CFA countries have successfully maintained a currency union for several decades, despite failing to meet many of optimum currency area criteria. We suggest that the CFA zone, while not optimal, has been at least sustainable. We test this sustainability hypothesis by relying on the Behavioral Equilibrium Exchange Rate (BEER) approach. In particular, we assess and compare the convergence process of real exchange rates towards equilibrium for the CFA zone countries and a sample of other sub-Saharan African (SSA) countries. Our findings evidence that internal and external balances have been fostered and adjustments facilitated in the CFA zone as a whole—compared to other SSA countries—as well as in each of its member countries.

Suggested Citation

  • Cécile Couharde & Issiaka Coulibaly & David Guerreiro & Valérie Mignon, 2012. "Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?," EconomiX Working Papers 2012-34, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2012-34
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    Cited by:

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    2. Nchofoung, Tii N., 2022. "Trade shocks and labour market resilience in Sub-Saharan Africa: Does the franc zone response differently?," International Economics, Elsevier, vol. 169(C), pages 161-174.
    3. Dieudonné Mignamissi, 2018. "Monnaie unique et intégration par le marché en Afrique: le cas de la CEEAC et de la CEDEAO," African Development Review, African Development Bank, vol. 30(1), pages 71-85, March.
    4. 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.
    5. Alexandre Henry, 2019. "Monetary Union, Competitiveness and Raw Commodity Dependence: Insights from Africa," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(2), pages 285-301, June.
    6. 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.
    7. Mignamissi, Dieudonné, 2020. "The CFA Franc effect on trade," MPRA Paper 99018, University Library of Munich, Germany.
    8. Blaise Gnimassoun, 2017. "Exchange rate misalignments and the external balance under a pegged currency system," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 949-974, November.
    9. Mervan Selçuk & Şakir Görmüş, 2022. "Is a Monetary Union Feasible for D-8 Countries? An Examination in The Framework of The Optimum Currency Area," Journal of Economic Policy Researches, Istanbul University, Faculty of Economics, vol. 9(1), pages 75-101, January.
    10. Couharde, Cécile & Coulibaly, Issiaka & Damette, Olivier, 2013. "Anchor currency and real exchange rate dynamics in the CFA Franc zone," Economic Modelling, Elsevier, vol. 33(C), pages 722-732.
    11. 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.
    12. Dieudonné Mignamissi, 2021. "Coûts/gains commerciaux de l'intégration monétaire dans la Zone Franc africaine: Une analyse à partir de 5 scenarii," African Development Review, African Development Bank, vol. 33(1), pages 180-192, March.
    13. Issiaka Coulibaly & Blaise Gnimassoun, 2013. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Working Papers hal-04141160, HAL.
    14. Gnimassoun, Blaise & Coulibaly, Issiaka, 2014. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Economic Modelling, Elsevier, vol. 40(C), pages 208-226.

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    More about this item

    Keywords

    Equilibrium exchange rates; CFA zone; Optimum Currency Areas; currency union sustainability;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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