Factors Explaining the Real Effective Exchange Rate in Franc Zone: A New View

Abstract

Although there is an abundant literature on the determinants of the real effective exchange rate, no study has focused specifically on all the African countries in the Franc zone, whose currencies are still pegged to the euro by a fixed parity, despite the end of the gold standard in 1971. The main objective of this article is to identify the main factors explaining the real effective exchange rate in the franc zone. The data used in this work cover 15 countries that use the CFA franc over the period 1990-2019. To achieve our objective, we mobilized several estimation methods such as the Driscoll and Kraay method, the Panel Corrected Standard Error (PCSE) and the Feasible Generalized Least Squares (FGLS) method. The results of this study reveal that inflation, money supply, the interest rate, gross domestic product per capita, imports and direct investment are the main determinants of the real effective exchange rate in the franc zone.