Journal Article

Estimating Equilibrium Real Exchange Rates in the Franc Zone

Simeon Coleman

in Journal of African Economies

Volume 17, issue 4, pages 600-634
Published in print August 2008 | ISSN: 0963-8024
Published online April 2008 | e-ISSN: 1464-3723 | DOI: https://dx.doi.org/10.1093/jae/ejm043
Estimating Equilibrium Real Exchange Rates in the Franc Zone

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  • Other Economic Systems
  • Multiple or Simultaneous Equation Models; Multiple Variables
  • Macroeconomic Aspects of International Trade and Finance
  • International Finance

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This paper estimates the degree of real exchange rate misalignment in 12 CFA (Communauté Financière Africaine) franc zone countries over the period 1960–99. Allowing for contemporaneous error co-variances, due to observed cross-sectional dependence, we use seemingly unrelated regressions equation estimations to estimate the equilibrium real effective exchange rate and degree of misalignment in each country. We find significant differences across member-states, however, the largest economies—Cameroon, Côte d'Ivoire and Senegal—showed some striking similarities. Just prior to the 1994 devaluation, these three economies were much more overvalued compared with the smaller member-states, some of which were either marginally misaligned or virtually in equilibrium. In 1994, only Côte d'Ivoire is exactly in equilibrium as a result of the devaluation. Our analysis of misalignment for the period after 1994 suggests that some challenges lie ahead for the CFA franc zone, if fixed parity is to be maintained.

Keywords: C33; F33; F42; P47

Journal Article.  9275 words.  Illustrated.

Subjects: Other Economic Systems ; Multiple or Simultaneous Equation Models; Multiple Variables ; Macroeconomic Aspects of International Trade and Finance ; International Finance

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