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Growth in the West African Economic and Monetary Union (WAEMU) was moderate in 2004 and 2005 as the region grappled with the real appreciation of the CFA franc and falling prices for its core commodity exports. Per capita income growth was positive but below the sub-Saharan African average, according to the IMF’s recent economic review. WAEMU countries also contended with domestic problems, including food shortages in some, weak fiscal performance, sociopolitical crises, and financial sector difficulties. In this environment, the WAEMU had difficulty implementing regional policies and made slow progress in complying with the convergence criteria for the monetary union.
IMF Managing Director Horst Köhler traveled to Ethiopia on July 5 to discuss the challenges facing the drought-stricken country and to emphasize the IMF’s strong commitment to support the country’s long-term vision for economic growth and poverty reduction. In subsequent stops on the week-long trip, Köhler visited Kenya, Madagascar, and Mozambique, where he attended the African Union Heads of State meeting in Maputo.
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The multilateral exchange rate model (MERM), like most large models in use, is continuously changing because of ongoing work to improve its logical structure and to increase its empirical content, and also because of the need to modify the model in response to changing economic conditions, thus maintaining its usefulness as a tool for studying policy alternatives. As a result, the description of the MERM presented by Artus and Rhomberg (1973) is now somewhat out of date, and it was felt that an updated description of the model, hereinafter referred to as MERM 2, was needed. At the same time, the basic theoretical approach, which has not changed, is explained further, and the main macroeconomic assumptions are made more explicit.
The Analysis of the effects of changes in exchange rates on foreign trade flows requires that account be taken of the simultaneous interaction among prices, incomes, and spending of the countries whose exchange rates have been altered and of the trading partners of these countries. The complexity of the problem increases when simultaneous changes in the exchange rates of several closely associated countries are examined. The model described below was developed to facilitate the assessment of the trade effects of such changes that would occur after an adjustment period of two to three years. Thus, the model is not directly relevant to estimating either short-run effects (within the first year after the exchange rate changes) or ultimate long-run effects (when all commodity and factor prices may be considered perfectly flexible, and labor and capital perfectly mobile).