Transcript The CFA Franc Zone

What Can We Learn from
the CFA Franc Zone?
David Fielding
Lambert Bamba
Simeon Coleman
Akira Nishiyama
Anja Shortland
Jean-Paul Azam
Mike Bleaney
Kevin Lee
Kalvinder Shields
David Stasavage
OECD, Paris 21.02.2006
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.
• 1994 devaluation. Reform of rules
governing central bank lending.
• Now DM corresponds to DNFA 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: 683-704, 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
0.8
0.6
0.4
0.2
0.0
0.2
-
82
84
Burkina
Senegal
86
88
90
Cote d’Ivoire
Togo
92
94
Mali
norm
96
98
Niger
00
Nominal Convergence Indicators:
(ii) Capital Spending
0.30
0.25
0.20
0.15
0.10
0.05
0.00
86
Burkina
Senegal
88
90
92
Cote d’Ivoire
Togo
94
96
Mali
Benin
98
Niger
norm
00
Nominal Convergence Indicators:
(iii) Tax Revenue
0.25
0.20
0.15
0.10
0.05
86
Burkina
Senegal
88
90
92
Cote d’Ivoire
Togo
94
96
Mali
Benin
98
Niger
norm
00
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.
BCEAO discount rate
France CB refinancing rate
10
2.5
60
period
132
What Drives the BCEAO
Interest Rate?
Probability of an Interest Rate Cut
Variable
1 s.d.
2 s.d.
3 s.d.
UEMOA inflation ↓
1%
13%
62%
Output gap ↑
2%
24%
83%
Govt debt / GDP ↓
0%
2%
6%
Foreign assets / GDP ↑
3%
5%
93%
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.