NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Do the Benefits of Fixed Exchange Rates Outweigh Their Costs? The Franc Zone in Africa

Shantayanan Devarajan, Dani Rodrik

NBER Working Paper No. 3727
Issued in June 1991
NBER Program(s):   LS

We develop a simple formal framework to clarify the trade-offs involved in the choice between a fixed and flexible exchange-rate system. We then apply the framework to the CFA Zone countries in Africa, which have maintained a fixed parity with the French Franc since independence. Thanks to the predominance of a few agricultural products and natural resources in their exports, CFA member countries have suffered frequent shocks in their terms of trade. A flexible exchange rate could have possibly alleviated the costs of these external shocks. On the other hand, CFA member countries have managed to maintain lower inflation levels than their neighbors. Our framework provides a way of weighing these costs and benefits. The inflation differential between CFA and non-CFA African countries has been around 14 percentage points. We attribute this differential to the standard time-consistency problem inherent in discretionary macroeconomic policy. Nonetheless, our highly stylized calculations suggest that fixed exchange rates have been, on the whole, a bad bargain for the CFA member countries. Under reasonable output-inflation tradeoffs, the output costs of maintaining a fixed exchange rate have outweighed the benefits of lower inflation.

download in pdf format
   (208 K)

email paper

This paper is available as PDF (208 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3727

Published: I. Goldin and A. Winters, eds., International Dimensions of Structural Adjustment. London: Cambridge University Press for CEPR, 1992

Users who downloaded this paper also downloaded these:
Obstfeld and Rogoff w5191 The Mirage of Fixed Exchange Rates
Edwards w5756 The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes
Devereux and Engel w6867 Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime
Calvo and Mishkin w9808 The Mirage of Exchange Rate Regimes for Emerging Market Countries
Frankel w11274 On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us