Working Paper: NBER ID: w1574
Authors: Jorge Braga de Macedo
Abstract: The paper presents a model of a monetary union designed to illuminate monetary and exchange rate policy in the West African Monetary Union (UMOA). Emphasis is placed on the interaction of the members of UMOA with each other, through the common central bank, and on their interaction with France and the rest of the world. As a consequence, the structure of the national economies depends essentially on their size.The relative size of the partners is reflected in the source and type of disturbances as well as in the trade pattern: large countries are not affected by disturbances originating in small countries. Small countries are affected by all external disturbances. The collective nature of the pegging becomes important because the small countries are taken to be of equal size.Using a four-country, two-tier macroeconomic model, it is shown that the pseudo-exchange rate union with the large partner has no effect on the real exchange rates of the small countries but affect their price levels, whereas a full monetary union requires in principle a transfer whose allocation between the two small countries by their common central bank may have real effects. This transfer is precisely provided by the large country, as guarantor of the fixed exchange rate arrangement. When both small countries are in surplus, there is a reverse transfer to the large country, with no monetary consequences. In line with the findings of the model, evidence is provided on monetary allocations in UMOA and on the real exchange rates of its major members, as compared to ot her African countries.
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Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pseudo-exchange rate union with a large partner (France) (F31) | price levels of small countries (P22) |
| pseudo-exchange rate union with a large partner (France) (F31) | real exchange rates of small countries (F31) |
| monetary transfers from large country (F24) | real economic conditions of small countries (F41) |
| allocation of monetary transfers by the common central bank (E58) | changes in real economic conditions (E39) |
| small countries in surplus (H62) | reverse transfer to large country (F16) |
| size of national economies (F40) | structure of national economies (L16) |
| external shocks (F69) | internal economic stability (E64) |