Adam, Christopher., David L. Bevan, Gerard Chambas (2001), “Exchange Rate Regimes and Revenue Performance in Sub-Saharan Africa,” Journal of Development Economics, Vol. 64, pp. 173-213.
Adam, Christopher, Benno Ndulu and Nii Kwaku Sowa (1996), “Liberalisation and Seigniorage Revenue in Kenya, Ghana and Tanzania,” The Journal of Development Studies, Vol. 32, No. 4, pp. 531-553.
Beetsma, Roel and A. Lans Bovenberg (1997), “Does Monetary Unification Lead to Excessive Debt Accumulation?” Journal of Public Economics, 74:299-325.
Beetsma, Roel, and A. Lans Bovenberg (1998), “Monetary Union without Fiscal Coordination May Discipline Policymakers,” Journal of International Economics, 45: 239-258.
Bayoumi, Tamim, Morris Goldstein, and Geoffrey Woglom (1995), “Do Credit Markets Discipline Sovereign Borrowers? Evidence from US States,” Journal of Money, Credit and Banking, 27(4): 1046-59.
Bovenberg, A. Lans, Jeroen Kremers, and Paul Masson (1991), “Economic and Monetary Union in Europe and Constraints on National Budgetary Policies,” IMF Staff Papers, 38 (June): 374-98.
Buti, Marco, Andrés Sapir, eds. (1998), Economic Policy in EMU: A Study by the European Commission Services (Oxford: Clarendon Press).
Chari, V.V. and Patrick Kehoe (1998), “On the Need for Fiscal Constraints in a Monetary Union,” Working Paper 589, Minneapolis: Federal Reserve Bank of Minneapolis.
Cukierman, Alex, Steven Webb, and Bilin Neyapti (1992), “Measuring the Independence of Central Banks and its Effects on Policy Outcomes,” World Bank Economic Review, 6(3): 353-98.
De Haan, Jakob, and Willem Kooi (2000), “Does Central Bank Independence Really Matter? New Evidence for Developing Countries Using a New Indicator,” Journal of Banking and Finance, 24: 643-64.
Eichengreen, Barry, and Charles Wyplosz (1998), “Stability Pact: More than a Minor Nuisance?” Economic Policy, 26 (April): 67-113.
Fatás, Antonio and Andrew Rose (2000), “Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes,” mimeo.
Guillaume, Dominique, and David Stasavage (2000), “Improving Policy Credibility: Is There a Case for African Monetary Unions?” World Development, Vol. 28, No. 8, pp. 1391-1407.
Hernández-Catá, Ernesto and others (1998), “The West African Economic and Monetary Union,” IMF Occasional Paper No. 170 (Washington: International Monetary Fund).
Hoffmaister, Alexander, Jorge Roldós, and Peter Wickham (1998), “Macroeconomic Fluctuations in Sub-Saharan Africa,” IMF Staff Papers, 45: 132-60
Honohan, Patrick, and Philip Lane (2000), “Will the Euro Stimulate More Monetary Unions in Africa?” Policy Research Working Paper No. 2393 (Washington: World Bank)
Masson, Paul and Catherine Pattillo (2001), Monetary Union in West Africa (ECOWAS)—Is it Desirable and How Could it be Achieved?, Occasional Paper No. 204 (Washington: International Monetary Fund).
Mehran, Hassanali, Piero Ugolini, Jean Philippe Briffaux, George Iden, Tonny Lybeck, Stephen Swaray, and Peter Hayward (1998), Financial Sector Development in Sub-Saharan African Countries, Occasional Paper 169 (Washington: International Monetary Fund).
Milesi-Ferretti, Gian Maria (2000), “Good, Bad or Ugly? On the Effects of Fiscal Rules with Creative Accounting,” IMF Working Paper WP/00/172 (October).
Nascimento, Jean-Claude (1994), “Monetary Policy in Unified Currency Areas: The Cases of the CAMA and ECCA during 1976-90,” IMF Working Paper WP/94/11 (January).
Nashashibi, K. and Stefania Bazzoni, (1994), “Exchange Rate Strategies and Fiscal Performance in Sub-Saharan Africa,” IMF Staff Papers, Vol. 41, No. 1 (March).
Stasavage, David (2000), “The Franc Zone as a Restraint,” P. Collier, P. and C. Pattillo, eds., in Investment and Risk in Africa, pp. 275-305.
Stasavage, David (1997), “The CFA Franc Zone and Fiscal Discipline,” Journal of African Economies, Volume 6 (No. 1), pp. 132-67.
Tornell, Aaron and Andrés Velasco (2000), “Fixed Versus Flexible Exchange Rates: Which Provides More Fiscal Discipline?” Journal of Monetary Economics, 45, pp. 399-436.
This is a revised version of a paper presented at the American Economics Association annual meeting in New Orleans, January 4–6, 2001. We would like to thank Grace Juhn and Saji Thomas for research assistance, Paul Collier, Philip Lane, and David Stasavage for comments, as well as numerous colleagues at the IMF and the World Bank who made comments on a larger study (Masson and Pattillo, 2001) on which this paper is partly based.
The meeting was attended by three heads of state, Presidents Olusegun Obasanjo of Nigeria, Jerry Rawlings of Ghana, and Lansana Conté of Guinea, as well as representatives from Liberia, Sierra Leone and the Gambia. Cape Verde, the remaining non-CFA ECOWAS country, has a currency peg to the euro with the support of Portugal, and was not a signatory of the Accra Declaration.
CFA stands for “Communauté financière africaine” when it refers to the West African franc zone.
ECOWAS, or Economic Community of West African States, is composed of the seven countries mentioned in footnote 1, plus the eight countries that are members of the West African CFA franc zone, namely Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo.
This argument has recently been turned on its head by Tornell and Velasco (2000), as discussed below.
The impetus for monetary union seems also to have been stimulated by the formation of the euro zone. See Irving (1999) and Honohan and Lane (2000).
The gravity model suggests bilateral trade among ECOWAS countries should be small, given the small size of their economies and low per capita income, while the EU exerts a strong gravitational pull, given the size of its economy and its proximity.
“ECOWAS Monetary Zone: Compensation Fund Underway,” This Day (Lagos), July 10, 2000. WAEMU has already established structural funds for sub-regional development.
A measure constructed by de Haan and Kooi (2000) based on the turnover of central bank governors is available only for a few of the ECOWAS countries.
While monetary union would have the largest consequences for seigniorage, Adam et al. (1996) also show that financial market liberalization and the development of domestic financial asset markets lowers the seigniorage capacity of governments by increasing the elasticity of substitution between base money and other financial assets. Honahan and Lane (2000) question whether higher past seigniorage should be seen as a significant hurdle for achieving monetary union, noting the rapid adjustment of policies to absorb the loss of seigniorage in the Mediterranean EU countries.
The ECCU consists of: Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. CFA zone countries include the 8 West African countries listed in footnote 3, plus the Central African zone members: Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea and Gabon.
Following Fatás and Rose we report only the coefficient and t-statistic for the currency board, unilateral and multilateral currency board dummies; we also add the adjusted R2. The coefficients for the control variables were generally significant and of the expected signs.
Almost all of the multilateral currency union observations in the sample were from unions with no fiscal rules. WAEMU instituted convergence criteria, including fiscal criteria, in 1993, but problems in their design limited effectiveness and led to adoption of a new process and set of criteria in 1999.
See also Nashashibi and Bazzoni (1994) and Tornell and Velasco (2000). The first paper argues that real exchange rate misalignment was a major factor in the deterioration of fiscal performance in the CFA zone during the second half of the 1980s. The second shows that between 1980–84, the CFA zone countries had worse fiscal adjustment than African countries outside the CFA Franc zone that had more flexible exchange rate arrangements, controlling for changes in terms of trade, initial debt and GDP per capita.
For each of the 2 zones, member countries’ reserves are held in separate Operations Accounts with the French Treasury. Each zone is required to hold external assets at least equal to 20 percent of the central bank’s sight deposits. The operations account is the mechanism through which France guarantees convertibility for the CFA franc.
Adam et al. (2000) show that real exchange rate misalignment contributed to the poor cumulative revenue performance of the CFA zone during 1980–94.
Dating the start of the convergence process in the EU is difficult, given that some of the stages (e.g. removal of capital controls by 1990) antedated signing of the Treaty, and the creation of the European Monetary System in 1979 was intended as Stage I of a transition to monetary union. Formal convergence programs were first introduced in 1992.
Italy was a founding member on January 1, 1999, while Greece did not become a member of the euro zone until January 1, 2001.
In particular, exchange rate stability was required for 2 years, though the widening of the bands of fluctuation made this condition less constraining from August, 1993. The general government debt criterion also stipulated that the trend was important, not just the level at a point in time.