Is Africa an Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits
Posted: 16 Jun 2008
Date Written: March 2007
This article examines the macroeconomic costs and benefits of adopting a common currency for 37 African countries. Economic theory suggests that the main benefit is enhanced price stability, whereas the main cost is higher business-cycle volatility if the member country's output is not sufficiently correlated with Africa's as a whole. Using data from 1960 to 2000, the article finds that the estimated cost and benefit measures exhibit substantial variability across the countries and are sometimes positively correlated: countries (such as Uganda, Ghana and Guinea) that have a lot to gain from a monetary union, also have a lot to lose from it; whereas other economies (such as Morocco, Cote d'Ivoire and Gabon) that have little to lose by adopting a common African currency, have also little to gain by it. The empirical results can also be used to compare net benefits for individual countries, showing, for example, that Nigeria is a more promising candidate for membership in an African monetary union than Kenya, and that Zambia is an unambiguously better candidate than either Benin or Mauritius.
Keywords: E32, E42, F41, F42
Suggested Citation: Suggested Citation