This paper investigates convergence in the price levels of the CFA franc zone countries to that of France and the interdependence of their inflation rates using the cointegration technique. Monthly data from 1979 to 1993 show that cointegration in price levels is accepted at the 5 percent confidence level in only 2 of 11 CFA franc zone countries. These results seem to contradict previous findings and the commonly held view that support the long-term convergence of price levels of these countries.
The Chow test proves that there is a change in the price level behavior in the mid-1980s. Regressions from 1979 to the break point and from the break point to 1993 provide different results. Over the first subperiod, the price levels of six countries are cointegrated with the price level in France. They are Burkina Faso, the Congo, Cote d’Ivoire, Mali, Niger, and Togo. Over the second subperiod, the price levels of seven countries are cointegrated with the price level in France: Burkina Faso, Cameroon, the Central African Republic, the Congo, Niger, Senegal, and Togo. Moreover, in all cases except the Congo, the cointegration regression coefficients change more or less significantly.
The above results clearly indicate a structural change in the price level pattern of the CFA franc zone countries in the mid-1980s. These findings are confirmed by the results of the error-correction model, which makes it possible to estimate the speed of adjustment of the price levels. Although the error-correction model explains little of the variations in the CFA countries’ monthly inflation rate, it can be helpful in predicting these inflations. The vector autoregression model is used to examine the causal relationship in inflation rates among the countries of the same monetary union. Based on the available data, no causal relationship can be determined.