ECOWAS single currency: Prospective effects on trade

Abstract

This paper examines the impact of the CFA franc on members' bilateral trade flows. We apply Baier et al. (2019) two-stage estimating technique to establish if the CFA franc trade effect makes a strong argument for broader ECOWAS single currency. We find that the CFA franc has no significant effect on bilateral trade in our first-stage analysis using a structural gravity model with three-way fixed effects. However, we discover unique heterogeneous estimates of the CFA franc trade effect across different country pairs in the union; 64% of the estimates are statistically insignificant, 7.3% are negative but significant, and 29% (mostly contiguous states) are positive and significant. Our second-stage analysis shows that the country pairs' economic sizes and geographical contiguities determine the ultimate CFA franc trade effect. Our findings indicate that future trade gains from the proposed ECOWAS common currency seem limited.