Abstract
This paper investigates the optimality of setting up a common currency area in West Africa by using a generalized purchasing power parity (GPPP) model. The Johansen method of multivariate cointegration shows that not only the existing CFA franc zone but also the emerging West African Monetary Zone (WAMZ) separately satisfy conditions for a common currency area, given the existence of common long?run trends in their real exchange rates. However, little evidence is found to substantiate such conditions for the entire West African region. The paper also analyzes the long?term sustainability of adopting a common currency basket in West Africa by using an alternative version of the GPPP model and estimating the endogenous weights of the euro and the US dollar as the anchor currencies. It finds that the weights are quite different between the CFA zone and the WAMZ, confirming the finding from the first part of the paper, namely, that these two sub?regions when combined do not constitute a sustainable common currency area.
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