West African Single Currency and Competitiveness

• Date: 01 November 2013
• Author: Kimiko Sugimoto,Gilles Dufrénot
• Published date: 01 November 2013
• DOI: http://doi.org/10.1111/rode.12064

West African Single Currency and Competitiveness

Gilles Dufrénot and Kimiko Sugimoto*

Abstract

This paper compares different nominal anchors to promote internal and external competitiveness in the

case of a fixed exchange rate regime for the future single regional currency of the Economic Community of

the West African States (ECOWAS). We use counterfactual analyses and estimate a model of dependent

economy for small commodity exporting countries. We consider four foreign anchor currencies: the US

dollar, the euro, the yen and the yuan. Our simulations show little support for a dominant peg in the

ECOWAS area if they pursue several goals: maximizing the export revenues, minimizing their variability,

stabilizing them and minimizing the real exchange rate misalignments from the fundamental value.

1. Introduction

This paper examines the question of optimal peg in the Economic Community of the

West African States (ECOWAS) area, where preparation towards a single regional

currency is under discussion. Indeed, the preparation of a new regional currency is

scheduled by 2020 and will be built by merging both the Communauté Financière

Africaine (CFA) zone countries and the West African Monetary Zone (WAMZ).1At

the early stages of the existence of the new currency, the central bankers will certainly

search to gain credibility and will choose to peg it to an international currency.2

Therefore, an important question is the following: which external peg would be the

best (we do not consider the case of a peg to a basket of currencies)?3

The main purpose of this paper is to study the choice of the peg when the countries’

purpose is to promote internal and external competitiveness. We consider four

foreign currencies: the US dollar, the euro, the yen and the yuan. We also examine

the case of a commodity peg. Following the methodology proposed by Frankel and

Saiki (2002), we consider an external anchor through a rigid peg to these currencies.

The paper first relies on a counterfactual analysis. Our goal is to see what would have

happened, if the countries had been pegged to these international currencies in the

past. Central to our analysis is the role played by the real prices of exported commod-

ities, because all these countries are commodity exporters.

One conclusion that emerges from our paper is that little support can be found

for a dominant peg in the ECOWAS area. In attempting to select an anchor cur-

rency with regard to internal and external competitiveness, an important element is

the direction toward which the anchor currency moves when the world price of

commodities changes. Our simulations show that the countries would not agree on

* Dufrénot: Banque de France, CEPII, DEFI and AMSE, Aix-Marseille University, Château La Farge,

Route des Milles, 13290 Aix-en-Provence Les Milles, France. E-mail: Lopaduf@aol.com. Sugimoto: Hirao

School of Management, Konan University, 8-33, Takamatsu cho, Nishinomiya City, Hyogo, 663-8204,

Japan. E-mail: kimiko@center.konan-u.ac.jp. We are grateful to Benjamin Carton, Jean-Paul Pollin and the

participants at the conference of “les taux de change dans les économies émergentes et en transition” on

December 17, 2009 at Orleans University and to the participants at the 85th WEAI annual conference on

July 2, 2010 at Portland for helpful remarks on a preliminary draft of this paper. However, all remaining

errors are our own.

Review of Development Economics, 17(4), 763–777, 2013

DOI:10.1111/rode.12064

© 2013 John Wiley & Sons Ltd