What Can We Learn from the CFA Franc Zone? David FieldingJean-Paul Azam Lambert BambaMike Bleaney Simeon ColemanKevin Lee Akira NishiyamaKalvinder Shields Anja ShortlandDavid Stasavage OECD, Paris

1. Benin; 2. Burkina; 3. Cote d’Ivoire; 4. Guinea-Bissau; 5; Niger; 6. Mali; 7. Senegal; 8; Togo; 9. Cameroon; 10. C.A.R.; 11. Chad; 12. Congo; 13. Gabon; 14. Eq. Guinea

The CFA Franc Zone 14 countries: 12 former French colonies + 2 late additions. Two monetary unions: UEMOA + CEMAC. Two central banks: BCEAO + BEAC. Two currencies (both called Franc CFA). Both currencies pegged to the Euro (formerly the French Franc). The peg is maintained by the French Treasury; this frees up the African central banks’ monetary policy.

Recent History Persistent Balance of Payments deficits in some CFA countries in the 1980s. High public and private borrowing from the central bank in some countries devaluation. Reform of rules governing central bank lending. Now  M corresponds to  NFA in the medium term. Similar to a currency board, but with much greater flexibility.

Four Questions Does the Franc Zone promote regional integration? 50 years of data versus 5 in the Euro Zone. Has there been any substantial economic convergence? Have the monetary authorities made good use of the flexibility given to them? What is the impact of the system on the poorest households?

Regional Integration (Economica 72: , 2005) Controlling for distance & language, what factors affect the volume of bilateral trade? And the degree of business cycle correlation? Does a fixed exchange rate matter? Does a common currency matter? What about the wider policy environment?

Regional Integration In the 1980s, being a member of the Franc Zone had an enormous impact on participation in regional trade. The effects in the 1990s were substantial but much smaller. In neither case does membership of the same currency area matter. Perhaps the 1990s more closely reflect an exchange rate stability effect, rather than a policy distortion effect.

Looking More Deeply at Economic Convergence We look at both “nominal” and “real” convergence indicators. Has there been any nominal convergence in the UEMOA since the Convergence Pact of 1999? How much real asymmetry remains in the UEMOA and CEMAC?

Nominal Convergence Indicators Inflation External deficit / GDP Budget balance / GDP Tax revenue / GDP Public wages / tax revenue Capital spending / tax revenue

Nominal Convergence Indicators: (i) Inflation BurkinaCote d’IvoireMaliNiger SenegalTogonorm

Nominal Convergence Indicators: (ii) Capital Spending BurkinaCote d’IvoireMaliNiger SenegalTogo Beninnorm

Nominal Convergence Indicators: (iii) Tax Revenue BurkinaCote d’IvoireMaliNiger SenegalTogo Beninnorm

Nominal Convergence Performance Inflation External deficit / GDP Budget balance / GDP Tax revenue / GDP Public wages / tax revenue Capital spending / tax revenue

Nominal Convergence Performance Inflation  External deficit / GDP Budget balance / GDP Tax revenue / GDP Public wages / tax revenue Capital spending / tax revenue

Nominal Convergence Performance Inflation  External deficit / GDP  Budget balance / GDP  Tax revenue / GDP  Public wages / tax revenue  Capital spending / tax revenue 

Real Convergence Measures We have 40+ years of data on price and output movements in the Franc Zone. Do the different economies face a similar macroeconomic environment? Are asymmetries smoothed out over time? How fast? Look at a “typical” shock causing prices (or output) to rise in the region.

Real Convergence Measures Substantial heterogeneity in price and output shocks. Some patterns emerge: Gabon/Congo versus the rest. Price asymmetries are smoothed out (but not very quickly). Output asymmetries persist indefinitely. So there is no single monetary policy suitable for all countries.

Monetary Policy The Franc Zone central banks are free to pursue an independent short-term monetary policy. But there is substantial macroeconomic heterogeneity across the member states: no single policy is ever best for all. So how active are the central banks? We look at the BCEAO.

What Drives the BCEAO Interest Rate? Probability of an Interest Rate Cut

What Drives the BCEAO Interest Rate? The BCEAO does respond in a systematic way to aggregate economic conditions in the UEMOA. But it is very cautious. Typical movements in prices and output have almost no impact on the likelihood of a change in the discount rate. Only extreme changes prompt action.

The CFA has delivered substantial benefits (price stability, trade integration). But there are potential costs for members of a monetary union with heterogeneous macroeconomic characteristics. There is very little macroeconomic convergence, especially in those areas beyond the direct control of the central banks. So monetary policy is extremely conservative.