Macroeconomic Shocks and Trade Flows within Sub-Saharan Africa: Implications for Optimum Currency Arrangements

IMF Working Papers, December 1, 1995

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The paper examines whether the existing highly fractured monetary arrangements in Sub-Saharan Africa correspond to expectations from the theory of optimum currency areas.
Main result: "The results indicate little evidence that Sub-Saharan African countries would benefit in the near future from larger currency unions."

Analytical focus:
- Size and correlation of real disturbances across countries.
- Level of intra-regional trade.
Geographic focus: Sub-Saharan Africa, with attention to entities such as the CFA franc zone and ECOWAS country groupings.
The work situates findings in the context of Optimum Currency Areas and monetary unions.

Little evidence supports near-term benefits from larger currency unions among Sub-Saharan African countries.
Empirical inputs emphasized:
- Measures of real disturbance magnitudes and correlations.
- Intra-regional trade shares (ECOWAS trade share, group trade, trade share).
- Inflation and inflation correlation across countries.
Policy implication inferred by analysis: existing fragmented exchange rate and monetary arrangements are consistent with the empirical patterns observed; consolidation into larger currency unions is not evidently advantageous in the near term.

Subjects: Conventional peg, Currencies, Economic integration, Exchange rate arrangements, Foreign exchange, Inflation, Monetary unions, Money, Prices
Keywords: Africa, CFA franc zone, Conventional peg, Currencies, East Asia, ECOWAS country, ECOWAS trade share, exchange rate arrangement, Exchange rate arrangements, group trade, Inflation, inflation correlation, Monetary unions, Optimum Currency Areas, share rise, Sub-Saharan Africa, trade share, West Africa, WP