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Asymmetric Terms-of-Trade Shocks in a Monetary Union: An Application to West Africa

Benjamin Carton (), Agnès Benassy-Quere (), Gilles Dufrénot () and Loïc Batté

Journal of African Economies, 2010, vol. 19, issue 5, 657-690

Abstract: We propose a two-country dynamic stochastic general equilibrium model of a monetary union facing asymmetric terms-of-trade shocks, calibrated on Nigeria and West African Economic and Monetary Union (WAEMU). Three monetary regimes are successively studied at the union level: a flexible exchange rate with constant money supply, a flexible exchange rate with an accommodating monetary policy and a fixed exchange-rate regime. We find that, in the face of oil-price shocks, the most stabilising regime for Nigeria is a fixed money supply, whereas it is a fixed exchange rate for WAEMU. However, the introduction of an oil-stabilisation fund can reduce the disagreement on the common policy rule. Furthermore, the two zones may agree on a fixed money-supply rule in the face of both oil- and agricultural-price shocks. Copyright 2010 The author 2010. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2010
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Working Paper: Asymmetric Terms-of-Trade Shocks in a Monetary Union: An Application to West Africa (2010)
Working Paper: Asymmetric Terms-of-Trade Shocks in a Monetary Union: An Application to West Africa (2010)
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