Do the benefits of fixed exchange rates outweigh their costs? The Franc Zone in Africa

Shantayanan Devarajan and Dani Rodrik

No 777, Policy Research Working Paper Series from The World Bank

Abstract: The authors develop a simple, formal framework for clarifying the tradeoffs involved in choosing between a fixed and flexible exchange rate system. They apply this framework to the countries of Africa's CFA Zone, which have maintained fixed parity with the French franc since independence. Because a few agricultural products and natural resources dominate their exports, member countries of Africa's CFA Zone have suffered frequent shocks in terms of trade. A flexible exchange rate could possibly have alleviated the costs of these external shocks. On the other hand, CFA member countries have managed to maintain lower inflation levels than their neighbors. The fixed exchange rate of the CFA Zone acts as a credible committment. The government"ties its own hands"so that it will not be tempted to use the exchange rate, thereby eliciting lower wage and price increases from the private sector. Weighing this benefit against the costs of nonadjustment to external shocks, the authors conclude that fixed exchange rates have been a bad bargain for the CFA member countries. These countries would have been better off having the ability to adjust to external shocks.

Keywords: Environmental Economics&Policies; Macroeconomic Management; Fiscal&Monetary Policy; Economic Stabilization; Economic Theory&Research (search for similar items in EconPapers)
Date: 1991-10-31
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
http://www-wds.worldbank.org/external/default/WDSC ... d/PDF/multi0page.pdf (application/pdf)

Related works:
Working Paper: Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa (1991)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wbk:wbrwps:777

Access Statistics for this paper

More papers in Policy Research Working Paper Series from The World Bank 1818 H Street, N.W., Washington, DC 20433. Contact information at EDIRC.
Bibliographic data for series maintained by Roula I. Yazigi ().