The Euro and the CFA Franc: Evidence of Sectoral Trade Effects

  • Inmaculada Martínez-ZarzosoEmail author
Research Article


This paper estimates a gravity model of trade to evaluate the trade effects of the Euro on sectoral trade within the Eurozone (EZ), the CFA Franc Zone (CFA) and between the EZ and the CFA, when CFA countries acquired fixed rates against the non-francophone EZ members. The formation of the EZ provides a quasi-natural experiment to estimate the effects on trade of fixed exchange rates, since the change in exchange rate regime for CFA countries with all EZ countries but France was not trade related. This is tested using sectoral trade data for 175 countries over the period 1995–2016 and validated using a longer time period starting in the seventies. The main departure from Frankel (2008), is the estimation of a structural gravity model using sectoral trade and bilateral-sectoral fixed effects as well as controls for multilateral resistance, namely time varying country-sector fixed-effects for exporters and importers, in a PPML framework. The main results indicate that the introduction of the Euro does show positive and significant effects for export flows from the CFA to other EZ countries different from France, whereas exports in the opposite direction are negatively affected. Moreover, the results differ by sector and we find that agricultural and homogeneous goods exports from CFA countries to Euro adopters increased by around forty and hundred twenty percent, respectively after the euro adoption.


CFA Euro effect Bilateral trade Panel data Rauch classification Sectoral trade PPML Structural gravity 

JEL Classification

F10 F14 



Financial support received from the Spanish Ministry of Economy and Competitiveness, Project ECO2017-83255-C3-3-P (AEI, FEDER, EU) and from project UJI-B2017-33 is gratefully acknowledged. I also would like to thank the editor and the anonymous referee for their helpful comments and suggestions.


  1. Aizenman J (2018) Optimal currency area: a twentieth century idea for the twenty-first century? Open Econ Rev 29:373–382CrossRefGoogle Scholar
  2. Anderson JE, van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93(1):170–192CrossRefGoogle Scholar
  3. Auboin M, Ruta M (2011) The relationship between exchange rates and international trade: a review of economic literature. WTO Working Paper, 17(October)Google Scholar
  4. Bahmani-Oskooee M, Hegerty SW (2007) Exchange rate volatility and trade flows: a review article. J Econ Stud 34(3):211–255CrossRefGoogle Scholar
  5. Baldwin R (2006) The euro’s trade effect. ECB Working Paper Series, 594Google Scholar
  6. Baldwin R, Skudelny F, Taglioni D (2005) Trade effects of the euro: evidence from sectoral data. ECB Working Papers, No. 446Google Scholar
  7. Baldwin R, Di Nino V., Fontagné, L., De Santis RA, Taglioni D (2008) Study on the impact of the euro on trade and foreign direct investment. European Economy - Economic Papers, No. 321Google Scholar
  8. Baltagi B, Egger P, Pfaffermayr M (2014) Panel data gravity models of international trade. CESifo Working Paper No 4616Google Scholar
  9. Baranga T (2014) Estimating the effects of fixed exchange rate regimes on trade: evidence from the formation of the Euro. Department of Economics, UC San Diego. Accesed 10 Feb 2018
  10. Carrere C (2004) African regional agreements: impact on trade with or without currency unions. J African Economies. Centre for the Study of African Economies (CSAE) 13(2):199–239Google Scholar
  11. De Sousa J (2012) The currency union effect on trade is decreasing over time. Econ Lett 117(3):917–920CrossRefGoogle Scholar
  12. De Sousa J, Lochard J (2005) Do currency barriers solve the border effect puzzle? Evidence from the CFA franc zone. Rev World Econ 141(3):422–441CrossRefGoogle Scholar
  13. Diallo O, Tapsoba SJ-A (2016) Rising BRIC and changes in Sub-Saharan Africa's business cycle patterns. World Econ 39:260–284CrossRefGoogle Scholar
  14. Fally T (2015) Structural gravity and fixed effects. J Int Econ 97(1):76–85CrossRefGoogle Scholar
  15. Fielding D, Shields K (2005) The impact of monetary union on macroeconomic integration: evidence from West Africa. Economica 72(288):683–704CrossRefGoogle Scholar
  16. Flam H, Nordström H (2003) ‘Trade volume effects of the euro: aggregate and sector estimates’. IIES Seminar Papers, No. 746Google Scholar
  17. Flam, H. and Nordström, H. 2006. Euro Effects on the Intensive and Extensive Margins of Trade. CESifo Working PaperSEries Nº 1881, CESifo Group MunichGoogle Scholar
  18. Frankel J (2008) The estimated effects of the euro on trade: why are they below historical effects of monetary unions among smaller countries? NBER Working Papers, 14542Google Scholar
  19. Frankel J (2010) The estimated trade effects of the euro: why are they below those from historical monetary unions among smaller countries? In: Alesina A, Giavazzi F (eds) Europe and the euro. University of Chicago Press, ChicagoGoogle Scholar
  20. Girardini E, Sall CAT (2018) Inflation dynamics of franc-zone countries determinants, co-movements and spatial interactions. Open Econ Rev 29(2):295–320CrossRefGoogle Scholar
  21. Glick R, Rose A (2002) Does a currency union affect trade? The time-series evidence. Eur Econ Rev 46(5):1125–1151CrossRefGoogle Scholar
  22. Glick R, Rose A (2016) Currency unions and trade: a post-EMU reassessment. Eur Econ Rev 87:78–91CrossRefGoogle Scholar
  23. Hallet M (2008) The role of the euro in sub-Saharan Africa and in the CFA franc zone. European Economy - Economic Papers, 347Google Scholar
  24. Head K, Mayer T (2014) Gravity equations: workhorse, toolkit, cookbook. In: Gopinath G, Helpman E, Rogoff K (eds) Handbook of international economics, vol 4. North Holland: 131-195.Google Scholar
  25. Kelejian H, Tavlas GS, Petroulas P (2012) In the neighborhood: the trade effects of the euro in a spatial framework. Reg Sci Urban Econ 42(1–2):314–322CrossRefGoogle Scholar
  26. Larch, M., Wanner, J., Yotov, Y. and Zylkin, T., 2017. Currency union and trade. A PPML Re-assessment with high-dimensional fixed effects. CESifo Working Paper Series Nº 6464, CESifo Group, Munich.Google Scholar
  27. Masson PR (2008) Currency unions in Africa: is the trade effect substantial enough to justify their formation? World Econ 31(4):533–547CrossRefGoogle Scholar
  28. Mayer T, Zignago S (2011) Notes on CEPII’s distances measures: the GeoDist database. CEPII Working Paper N°2011-25, CEPII, ParisGoogle Scholar
  29. McKenzie MD (1999) The impact of exchange rate volatility on international trade flows. J Econ Surv 13(1):71–106CrossRefGoogle Scholar
  30. Micco A, Stein E, Ordoñez G (2003) The currency union effect on trade: early evidence from EMU. Econ Policy 18(37):315–343CrossRefGoogle Scholar
  31. Ozturk I (2006) Exchange rate volatility and trade: a literature survey. Int J Appl Econ Quant Stud 3(1):85–102Google Scholar
  32. Rauch JE (1999) Networks versus markets in international trade. J Int Econ 48(1):7–35CrossRefGoogle Scholar
  33. Rose AK (2000) One money, one market: estimating the effect of common currencies on trade. Econ Policy 15(30):7–46CrossRefGoogle Scholar
  34. Rose AK (2017) Why do estimates of the EMU effect on trade vary so much? Open Econ Rev 28(1):1–18CrossRefGoogle Scholar
  35. Santos Silva JMC, Tenreyro S (2006) The log of gravity. Rev Econ Stat 88(4):641–658CrossRefGoogle Scholar
  36. Tapsoba SJ-A (2009) Trade intensity and business cycle synchronicity in S. Jules-Armand Africa. J African Economies. Centre for the Study of African Economies (CSAE) 18(2):287–318Google Scholar
  37. The Economist (2018) Francophone Africa’s CFA frank is under Fire. Print Edition. Middle East Africa Section. Jan 27th 2108Google Scholar
  38. Tsangarides CG, Ewenczyk P, Hulej M (2006) Stylized facts on bilateral trade and currency unions : implications for Africa. IMF Working Paper, (WP/06/31)Google Scholar
  39. Zylkin T 2017) PPML_PANEL_SG: Stata Module to Estimate “Structural Gravity” Models via Poisson PML. Accesed 15 March 2018

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Georg-August Universität GöttingenGöttingenGermany
  2. 2.Universitat Jaume ICastellónSpain
  3. 3.Department of EconomicsUniversity of GoettingenGoettingenGermany

Personalised recommendations