The macroeconomics of the monetary union of sub-Saharan Africa, the CFA franc zone

Primarily, this thesis assesses the extent of macroeconomic convergence among the countries that make up the CFA Franc zone, the oldest single-currency arrangement in the world. The analyses is conducted from three perspectives and addresses the following issues: (i) Do the CFA Franc zone countries differ in the ways they respond to macroeconomic shocks? Here, we also consider some extensions: one is geographic to include other non-CFA countries in the sub-region for comparison, and the other is based on oil-exporting status (i.e. Production Structure); (ii) To what extent has real exchange rate misalignment in individual member states of the Franc zone differed over the period 1960-99? There is a school of thought that the only devaluation in the history of the Franc zone, in January 1994, was implemented for the sake of the larger economies. This part of the thesis determines whether there is an empirical basis for this claim; (iii) Following a shock to inflation, how do member states of the Franc zone differ in terms of persistence in food and non­ food price inflation? Under the assumption that the poor spend a larger proportion of their income on food, persistence in (especially) food price inflation is likely to have some deleterious consequences. Asymmetry in such persistence among member states will imply that policy makers will have to be particularly sensitive to such realities in forming the Zone’s policy. Chapters 1-3 review the background of the Franc zone and the empirical methods that are later used in the thesis. Chapters 4-6 are empirical studies, and are presented as separate units with each addressing a separate perspective, as listed above. To address the first issue, we apply the method of Blanchard and Quah (1989) in order to identify and estimate a structural VAR model appropriate for a small open economy. By decomposing the variance of the macroeconomic shocks in this way, the method extends the atheoretic VAR analysis and uses economic theory and timeseries analysis to determine the sources of disturbances to economic variables in Chapter 4. Next, defining real exchange rate misalignment as the percentage deviation of the actual from the estimated equilibrium value, Chapter 5 estimates the degree of misalignment in the real exchange rate for twelve individual member states of the Franc zone. Due to the ties that bind the countries together, we allow for the possible cross-sectional dependence in all analysis including the unit-root tests (Pesaran, 2005). By using a SUR model, we account for the cross-sectional dependence that is likely to exist among the residuals across member states. Chapter 6 investigates the degree of inflation persistence in the food and non-food sectors of thirteen individual Franc zone countries; for robustness of our estimates, we avoid the knife edge 1(0) /1(1) classification and make use of three semi-parametric methods [Geweke and Porter-Hudak (1983), Phillips (1999a,b) and Robinson (1995a)] of estimating the fractional integration parameter in an ARFIMA (p,d,q) model. Findings from all three perspectives provide substantial evidence of some heterogeneity among the macroeconomies of the Franc zone countries. The research findings suggest that the conduct of uniform policy, such as monetary policy, within the monetary union by the central bank is likely to result in some net losers and net beneficiaries. There are important lessons to be learned from the Franc zone, and with other economies in the sub-region of sub-Saharan Africa considering forming other monetary unions, this area of research is particularly relevant. There are also some lessons the EU central bank can learn from the Franc zone. This is the subject of a Policy Brief titled ‘What can the European Central Bank Learn from Africa? '’ and recently written and discussed by David Fielding, United Nations University (November, 2005). Acknowledgements First, I would like to thank my initial supervisor, Professor David Fielding, for the invaluable and continuing guidance and encouragement he has provided me throughout the preparation of this thesis, including making his dataset available to me for portions of this work. Second, I am extremely grateful to Professor Mustafa Caglayan and Dr. Rodney Strachan for their guidance and supervision at various stages of this thesis, to Professor Stephen Hall and Dr. Sourafel Girma for their extremely helpful comments, and to Dr. Martin Hoskins for taking the time to advise me on various issues throughout my study and . Third, I wish to thank the editors of the Journal o f African Economies and two anonymous referees who provided me with useful comments on an article version of Chapter 5 of this thesis, which I believe has improved the thesis. Finally, I thankfully acknowledge the United Nations University, World Institute of Development Economics Research (UNU-WIDER), Helsinki, Finland, for providing financial support during the period of my internship on the project ‘Long-Term Growth in the CFA-zone Countries o f Sub-Saharan Africa', which resulted in Chapter 4 of this thesis and a chapter in the book ‘Macroeconomic Policy in the Franc Zone'. Financial support for my studies from the University of Leicester and the Overseas Research Scheme (ORS) is also gratefully acknowledged. Without the funding they provided, I would not have been able to complete this thesis.