Currency Unions in Africa: Is the Trade Effect Substantial Enough to Justify Their Formation?

Abstract

Using estimates that currency unions double trade, we quantify the welfare effects of forming currency unions for the African regional economic communities and for the African Union as a whole. The potential increase in trade is shown to be small, and much less than that resulting from the adoption of the euro. Allowing for increased African trade does not overturn the negative assessment of African currency unions, due to asymmetries in countries' terms of trade shocks and their degree of fiscal discipline.

Keywords: Africa, currency unions, trade, regional economic communities, fiscal discipline