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The Impact of the Strong Euro on the Real Effective Exchange Rates of the Two Francophone African CFA Zones

AVERAGE INFLATION BALANCE OF PAYMENTS BASE YEAR BRAZILIAN REAL CANADIAN DOLLAR CAPITAL ACCOUNT CAPITAL FLOWS CENTRAL BANK CENTRAL BANKS CHANGES IN TRADE CHINESE YUAN COMMON CURRENCY COMPETITIVENESS CONSUMER PRICE INDEX CONVERTIBILITY COUNTRY MARKETS CURRENT ACCOUNT CURRENT ACCOUNT DEFICIT CURRENT ACCOUNTS DEBT DEFLATION DEVALUATION DEVELOPING COUNTRIES DEVELOPING COUNTRY DISEQUILIBRIUM DOMESTIC PRICE DOMESTIC PRICE INDEX DOMESTIC PRICES DUTCH DISEASE ECONOMETRIC ANALYSES ECONOMETRICS ECONOMIC ANALYSIS ECONOMIC GROWTH ECONOMIC HISTORIANS ECONOMIC PERFORMANCE ELASTICITY EQUILIBRIUM EURO EXCHANGE RATE EXCHANGE RATE APPRECIATION EXCHANGE RATE INDEXES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXPORT MARKETS EXPORT PRICES EXPORTS FISCAL BALANCE FIXED EXCHANGE RATE FIXED EXCHANGE RATES FLEXIBLE EXCHANGE RATES FOREIGN CURRENCY FOREIGN EXCHANGE FREE TRADE FREE TRADE ZONES FULL EMPLOYMENT GDP GLOBAL TRADE GOVERNMENT CONSUMPTION IMPACT OF TRADE IMPORT PRICES INCOME INCOME DEVELOPING COUNTRIES INCOME ELASTICITIES INDONESIAN RUPIAH INDUSTRIAL COUNTRIES INFLATION INFLATION RATE INFLATION RATES INSTITUTIONAL ARRANGEMENTS INTEREST RATE INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL RESERVES JAPANESE YEN KOREAN WON M1 MACROECONOMIC BALANCE MACROECONOMIC MANAGEMENT MACROECONOMIC POLICY MACROECONOMIC STABILITY MACROECONOMIC VARIABLES MACROECONOMICS MARKET CONFIDENCE MARKET SHARES MONETARY POLICIES MONETARY POLICY MONETARY UNION NET INCOME NIGERIAN NAIRA NOMINAL EXCHANGE RATE OPENNESS OVERVALUATION PEGS POLICY RESEARCH POVERTY REDUCTION PRICE OF IMPORTS PRICE STABILITY PURCHASING POWER PURCHASING POWER PARITY REAL EFFECTIVE EXCHANGE RATES REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATES REAL GDP REAL OUTPUT REGIONAL INTEGRATION RELATIVE PRICES SCENARIOS STABLE EXCHANGE RATE TERMS OF TRADE TERMS OF TRADE SHOCKS THAI BAHT TIGHT MONETARY POLICY TIME SERIES TRADABLE GOODS TRADE TRADE BALANCE TRADE DEFICIT TRADE FLOWS TRADE LIBERALIZATION TRADE SHOCKS TREASURY VOLATILITY WAEMU WEALTH WHOLESALE PRICE INDEX
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World Bank, Washington, DC
Africa
2012-06-20T17:37:49Z | 2012-06-20T17:37:49Z | 2005-10

The author estimates the degree of misalignment of the CFA franc since the introduction of the euro in 1999. Using a relative purchasing power parity-based methodology, he develops a monthly panel time series dataset for both the Economic and Monetary Community of Central Africa (CEMAC) zone and the West African Economic and Monetary Union (UEMOA) zone to compute a trade-weighted real effective exchange rate indexed series from January 1999 to December 2004. The author's main finding is that the real effective exchange rate appreciated by close to 8 percent in UEMOA and 7 percent in CEMAC, influenced by volatility in the euro-dollar bilateral exchange rate and conservative monetary policies in the two zones, resulting in a partial loss of competitiveness in export markets. The lower appreciation in Central Africa can be explained by lower inflation in CEMAC than in UEMOA and by the greater trade with higher inflation East Asian countries, partially offset by the peg to the dollar. However, the inclusion of "unrecorded trade" results in an appreciation of only 6 percent in the UEMOA zone and 6 percent in the CEMAC zone due to higher inflation in the two countries with unmonitored cross-border flows, Ghana and Nigeria. Using time series econometrics, an Engle-Granger two stage procedure for cointegration, and an error correction framework, a single equation modeling of the real exchange rate from 1970 to 2005 as a function of terms of trade, economic openness, aid inflows, and a dummy representing the 1994 devaluation, the author finds little statistical evidence of a long-run equilibrium exchange rate that is a vector of economic fundamentals. The dummy explains most of the real exchange rate behavior in the two zones, while openness in UEMOA has contributed to an appreciation of the real effective exchange rate.

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