De Facto Exchange Rate Policies in the MENA Region: Toward Deeper Cooperation

Bassem Kamar ()

No 408, Working Papers from Economic Research Forum

Abstract: The adoption of exchange rate policy coordination and cooperation within a regional framework becomes a necessity to avoid the self-fulfilling exchange rate crises, especially in the context of the MENA region, which is cursed with significant regional political instability. In this paper we have focused our attention on the Agadir countries, namely Egypt, Jordan, Morocco and Tunisia. According to the results of our econometric test, the real exchange rate behavior in our sample countries has been influenced in different ways by the theoretical determinants (the government spending policy, the monetary policy, the trade openness, the capital liberalization, and the terms of trade). We recommend that the Agadir countries should envisage the coordination of their equilibrium exchange rates through the creation of a common equilibrium central parity reflecting a weighted average of all their economic partners, bordered by a +/- 10 percent fluctuation band, taking into consideration the potential increasing role of the Euro in the Agadir countries’ trade induced by the Euromed agreement. Deeper cooperation would also require the creation of common liquidity fund, similar to the one in place in South East Asia (the Chiang Mai Agreement) in order to enhance the accumulation of substantial international currency reserves, which can allow the participating countries’ central banks to provide immediate liquidity support for any member that experiences short run balance of payments deficits. This cooperation should take place not only among the four Agadir countries but rather within the framework of the PAFTA, and with the support of the EU.

Pages: 27 pages
Date: 2004-08-01, Revised 2004-08-01
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Citations: View citations in EconPapers (7)

Published by The Economic Research Forum (ERF)

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