Kimiko Sugimoto

Does West Africa form an optimum currency area?: a generalized PPP approach

This paper investigates the optimality of setting up a common currency area in West Africa by using a generalized purchasing power parity (GPPP) model. The Johansen method of multivariate cointegration shows that not only the existing CFA franc zone but also the emerging West African Monetary Zone (WAMZ) separately satisfy conditions for a common currency area, given the existence of common long?run trends in their real exchange rates. However, little evidence is found to substantiate such conditions for the entire West African region. The paper also analyzes the long?term sustainability of adopting a common currency basket in West Africa by using an alternative version of the GPPP model and estimating the endogenous weights of the euro and the US dollar as the anchor currencies. It finds that the weights are quite different between the CFA zone and the WAMZ, confirming the finding from the first part of the paper, namely, that these two sub?regions when combined do not constitute a sustainable common currency area.

Reactions to Shocks and Monetary Policy Regimes: Inflation Targeting versus Flexible Currency Board in Ghana, South Africa and the WAEMU

The aim of this paper is to examine the monetary policy actions through which the central banks in the Sub-Saharan African countries have searched to eliminate the negative impacts of the shocks facing their economies. We compare two types of monetary policy regimes: a currency board regime (in the CFA zone countries) and an inflation targeting policy regime (in Ghana and South Africa). We compare the properties of both policies when the central banks respond to three negative shocks hitting the economies: a recessionary demand shock, a supply shock increasing inflation and a negative fiscal shock. We propose an FPAS model (forecasting and monetary policy analysis system) that extends the usual FPAS models used in the literature to evaluate the impact of several policies in response to different types of exogenous shocks. We find that both policies are inappropriate to help the economies exiting from the effects of negative demand shocks (the adjustment relies mainly on fiscal policy), both are essential when negative shocks to primary balance occur (fiscal policy aggravates the negative effects of the shocks), while inflation targeting dominates the currency board regime as a strategy to cope with positive shocks to inflation.

Pegging the future West African single currency in regard to internal/external competitiveness: a counterfactual analysis

This paper compares different nominal anchors in the case of a fixed exchange rate regime for the future single regional currency of the Economic Community of the West African States (ECOWAS). We study the anchor choice when the countries focus the exchange rate policy to promote internal and external competitiveness. We consider four foreign anchor currencies: the us dollar, the euro, the yen and the yuan. Using a counterfactual analysis, we find little support for a dominant peg in the ECOWAS zone. In attempting to select an anchor currency, as regards internal and external competitiveness, several aspects need to be taken into consideration: the variability of the commodity prices, adverse downward trend movements, the stability of export revenues and the invoicing currency. A discriminating element is the direction toward which the anchor currency moves, while the world price of commodities evolves in the opposite direction. Our simulations show that the countries would not agree on the same anchor if they pursue several goals: maximizing the export revenues, minimizing their variability, stabilizing them and minimizing the real exchange rate misalignments from its fundamental value.

Regional Integration and Risk Management of African Stock Markets

Abstract We examine how the degree of regional financial integration in African stock markets has evolved over the last eleven years. Despite increasing regional economic cooperation, the process of stock market integration has been slow. To facilitate growth via developed financial markets but keep financial stability risk at a minimum, further regional integration should be promoted, and mild capital controls on non-African investors may be necessary. A Diebold-Yilmaz spillover analysis is applied to ten African stock markets for the period between August 2004 and January 2015. We examine spillovers among four regions and among individual countries. Regional integration, as measured by total spillovers in Africa, is increasing but remains very low. These spillovers were temporarily heightened during the global financial crisis. Cross-regional spillovers are high between Northern and Southern Africa. Asymmetric capital controls on African and non-African investors must be considered to foster further regional integration and to mitigate financial stability risk. This is one of the few studies to address the construction of the future architecture of regionally integrated stock markets in emerging countries.