Author Affiliation, Ana.
Department of Economics
A common currency and exchange rate system for the West African monetary zone: Is the coronation approach feasible?
IEA Policy Analysis
Date of Publication
Examines the coronation or economist approach of meeting convergence criteria before adopting a common currency and exchange rate system in the West African Monetary Zone (WAMZ). The empirical evidence shows that the WAMZ economies are small and are becoming more closed with time. Herfindhal indices show that they are specialized in few agricultural, mineral mining, petroleum and its related products. Correlations of demand, supply and monetary shocks are relatively assymetric, except The Gambia which has significant symmetrical relationship with the rest of the members. Shocks variations are larger compared to the US. Relative sizes of shocks are larger across members as compared to the US; the ideal monetary union; and they are slow in adjusting to shocks. Considering that the WAMZ members do not meet most of the optimum currency area (OCA) criteria, are less diversified, experience assymetric shocks and fiscal dominance, it is not feasible for them to follow the coronation approach to adopt monetary union. Recommends that members of WAMZ adopt the monetarist approach which argues that by first adopting a currency and exchange rate system it will eliminate exchange rate uncertainty, reduce transaction cost, intensify trade integration and synchronze their business cycles to meet the OCA criteria, ex-post,as those criteria are endogenous. The loss of monetary autonomy will prevent members from addressing country specific shocks with monetary policy, curb their inflation, and impose fiscal discipline on them, as it will no longer be easy for members to print money to finance their deficits.....