The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe

39 Pages Posted: 1 Jul 2008

See all articles by Márcio Valério Ronci

Márcio Valério Ronci

International Monetary Fund (IMF) - African Department

Misa Takebe

University of Maryland - Department of Economics

Nisreen H. Farhan

International Monetary Fund (IMF) - African Department

Amar Shanghavi

affiliation not provided to SSRN

Jian-Ye Wang

International Monetary Fund (IMF) - European Department

Date Written: May 2008

Abstract

This paper assesses São Tomé and Príncipe's monetary and exchange rate arrangements in light of the country's monetary history and the relevant experience of comparable countries in Africa. The study highlights several structural characteristics of São Tomé and Príncipe including its very small size, high degree of openness, extensive use of foreign currencies, and inflexible product and factor markets in the consideration of an appropriate monetary and exchange regime. Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float. The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency. It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement.

Keywords: Working Paper, Exchange rate regimes, São Tomé and Príncipe, Currencies, Monetary systems, Debt management, Fiscal management, Small states

Suggested Citation

Ronci, Márcio Valério and Takebe, Misa and Farhan, Nisreen H. and Shanghavi, Amar and Wang, Jian-Ye, The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe (May 2008). IMF Working Papers, Vol. , pp. 1-37, 2008. Available at SSRN: https://ssrn.com/abstract=1153739

Márcio Valério Ronci (Contact Author)

International Monetary Fund (IMF) - African Department

1700 19th Street, NW
Washington, DC 20431
United States

Misa Takebe

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Nisreen H. Farhan

International Monetary Fund (IMF) - African Department

1700 19th Street, NW
Washington, DC 20431
United States

Amar Shanghavi

affiliation not provided to SSRN ( email )

Jian-Ye Wang

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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