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Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone

Cécile Couharde, Issiaka Coulibaly () and Olivier Damette

No 2011-28, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: In this paper, we analyse currencies' misalignments of the CFA zone countries and the adjustment process of their real effective exchange rates towards their equilibrium level over the period 1985-2007. To this end, we firstly estimate, using panel cointegration techniques, a long term relationship between the real effective exchange rate and economic fundamentals. Secondly, we estimate a panel smooth transition error correction model in order to take into account non linearities in the convergence process of real exchange rates towards their equilibrium level. Two main results emerge from our analysis. Firstly, the real appreciation of effective exchange rates in the CFA zone countries from the 2000s did not translate, in 2007, into a real overvaluation comparable to that occurring before the devaluation of the CFA franc in 1994. However, some countries are exceptions, indicating a strong heterogeneity within the CFA zone. Finally, the convergence process of real effective exchange rates towards their equilibrium level also differs substantially between country groups. These results tend to show the difficulty to apply a single exchange rate policy in the CFA zone and rather call for further coordination and policy harmonization between the countries.

Keywords: CFA zone; misalignments; panel smooth transition model (search for similar items in EconPapers)
JEL-codes: C23 F31 O1 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2011
New Economics Papers: this item is included in nep-mon and nep-opm
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Related works:
Working Paper: Misalignments and Dynamics of Real Exchange Rates in the CFA Franc Zone (2012)
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