The effect of exchange rate variability on trade: The case of the West African Monetary Union's imports

Abstract

The West African Monetary Union, during the period of this study, 1976–1982, comprised six countries — Benin, Burkina Faso, Coˆte d'Ivoire, Niger, Senegal, and Togo. Since their common currency, the CFA franc, has been pegged to the French franc at an unchanged rate since 1948, the entire nominal exchange rate variability that traders in the region face is due to movements in the French franc with respect to other currencies. In the face of exchange rate risk that is not always coverable, trade should be adversely affected. Using three measures of variability in the nominal effective exchange rate index, this paper finds that exchange rate variability has not affected the Union's real imports, or the diversification of trade away from the franc zone.