Is Africa an Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits

Posted: 16 Jun 2008

See all articles by Georgios Karras

Georgios Karras

University of Illinois at Chicago - Department of Economics

Date Written: March 2007

Abstract

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

Karras, Georgios, Is Africa an Optimum Currency Area? A Comparison of Macroeconomic Costs and Benefits (March 2007). Journal of African Economies, Vol. 16, Issue 2, pp. 234-258, 2007, Available at SSRN: https://ssrn.com/abstract=1146033 or http://dx.doi.org/ejl036

Georgios Karras (Contact Author)

University of Illinois at Chicago - Department of Economics ( email )

725 University Hall (UH)
Chicago, IL 60607-7121
United States
312-996-2683 (Phone)
312-996-3344 (Fax)

HOME PAGE: http://www.uic.edu/~gkarras/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
568
PlumX Metrics