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The CFA in the world of the euro: choice of an exchange rate regime for the African countries in the franc-zone

Senakpon Fidèle Ange DEDEHOUANOU student laureate

°1976 Benin
Licence in economic science, Université Nationale de Bénin, Cotonou, Benin, 2000

Le franc CFA à l'heure de l'Euro: Choix d'un régime de change pour les pays africains de la zone franc

The optimal choice of exchange rate regime is an important element of economic policy. Some fourteen African countries have opted for the formation of a monetary union, the so-called CFA-zone, and link their currency via a fixed ratio, formerly to the French franc and now to the euro. Technically speaking this zone consists of two monetary unions, namely the West African Monetary Union (WAMU) with eight members (Benin, Burkina Faso, Guinea-Bissau, Côte d’Ivoire, Mali, Niger, Senegal and Togo) and the Central African Monetary Union (CAMU) with six members (the Central African Republic, the Republic of Congo, Equatorial Guinea, Gabon, Cameroon and Chad).
The choice of such a fixed exchange rate system has a number of advantages, stability chief among them, which benefits the international commercial traffic of the member states, but it also has a number of potential disadvantages. Thus a member state gives up the possibility of an autonomous monetary policy in order, for instance, to reduce the impact on the country of external economic shocks, and monetary policy is conducted at the level of the union itself. This disadvantage is important only to the extent that member states have to deal with various types of external shocks among themselves and/or that their impact differs strongly from state to state. In the literature this phenomenon is called the asymmetry of shocks. As such, the occurrence of asymmetry could make a zone’s cost of participation greater than its advantages and existing zones with these characteristics are probably not optimal.
This thesis studies the optimality of the present CFA-zone and concentrates primarily on a detailed analysis of the degree of asymmetry of shocks for the present member states of the CFA-zone. In concrete terms this thesis carries through this analysis for three types of shocks, namely supply shocks, real demand shocks and monetary shocks, for eight countries of the CFA-zone (Burkina Faso, Côte d’Ivoire, Niger, Senegal, Togo, the Central African Republic, Gabon and Chad) and four European countries (Germany, France, Italy and Norway). This is done with the help of advanced quantitative techniques, more precisely via structural Vector AutoRegressive (VAR) models.
This analysis is rigorously carried through and leads to a number of interesting assessments. Demand shocks, though weak by nature, show a great extent of asymmetry. Supply shocks have greater and more lasting effects and from the analysis it appears that Côte d’Ivoire, Senegal, Togo, the Central African Republic and Chad could form the nucleus of a (more) optimal zone. The impact of monetary shocks proves insignificant. This analysis does present elements which confirm the assessment that, seen purely from the point of view of the asymmetric shock argument, the present CFA-zone is not an optimal monetary zone. Further analysis, including more countries and more currencies, should provide a more decisive answer to the question.

report by Prof. Dr D. Cassimon, Institute for Development Policy and Management, Universiteit Antwerpen, Belgium