Pegging or Floating? A Prospect for Regime Change in the Franc Area: Exchange Rate Practices

Today, monetary integration issues are at the heart of the debate among policy-makers and researchers alike. The economic literature presents potential danger for a country or group of countries that ties its currency to that of only one of its major trading partners. This article examines some of the issues related to the desirability of a formal common basket exchange rate peg for the franc zone. The analysis of the data shows that the argument for anchoring to a common basket is weaker if the exports of the countries in the region are closer to those of the major economies than to those of their regional neighbours. The strength of a regional exchange rate system depends on the degree of similarity in the economic structures, policies and internal and external shocks of each country. Analysis of the common factors affecting real effective exchange rates in the region and analysis of co-integration suggest that economic structures, policies and shocks are heterogeneous.