Monetary Union and Bilateral Trade among CFA Franc Zone Member Countries: An Empirical Analysis

Gnanderman Sirpe

doi:10.4236/me.2019.102028

Abstract

This paper examines the trade promoting effects of monetary union in the context of the CFA franc zone. Using the gravity model as a basis for predicting the volume of trade between countries, the study attempts to estimate the potential for increased trade within the CFA franc zone. The study shows that the CFA countries have experienced relatively low monetary growth, relatively strict budgetary disciplines, and consistently low inflation. However, the results of the study indicate that monetary union in the case of the CFA franc zone did not promote economic integration among member countries in the form of expanded trade. The actual trade among these countries remained small despite the use of common foreign exchange policy and free transferability of resources among these countries.

Highlights

The Franc Zone brings together fourteen African countries, grouped into two economic and monetary unions
States is the common bank of the countries of the West African Economic and Monetary Union while the Central Bank of Central African States is the common bank of the countries of the central African countries
In return for the unlimited convertibility guaranteed by France, the central banks of the CFA Zone are required to deposit at least 65% of their foreign exchange reserves from the French Treasury, on the account of operations opened on behalf of each of them

Summary

Introduction

The Franc Zone brings together fourteen African countries, grouped into two economic and monetary unions It is administered by two central banks, one for each monetary union [1]. Each Central Bank creates a CFA currency different from each other. The franc of the African financial community refers to the currency of the eight West African states and the franc of financial cooperation in Central Africa to the six other countries of Central Africa. The parity of the two CFA franc vis-à-vis the French franc remained unchanged from 1948 to 1994 (50 FCFA for one French franc). A single devaluation occurred on January 12, 1994 bringing the parity to 100 FCFA for one French franc

Sirpe DOI

Economic Performance and Institutional Structure of the CFA Franc Area

The Econometric Model

Theoretical Foundations and Empirical Justification of the Gravity Model

Specification of the Model

Presentation and Analysis of Results of Estimation

Period 1994-2006

Findings

Conclusions