Currency Crises and Capital Controls in Emerging Countries: The Case of the African CFA Franc and Its Euro Future

  • Emil-Maria Claassen


The ‘traditional’ currency crises over the past years occurred in those countries which had adopted the regime of a fixed exchange rate. This statement should not be interpreted as if any fixed-foreign-exchange-rate regime is crisis-prone. Two examples may be mentioned which are comparable with each other and which have performed extremely well.


Exchange Rate Central Bank Real Exchange Rate Monetary Union Exchange Rate Regime 
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    ‘Dollarized’ European ‘countries’ are Monaco (French franc since 1865); San Marino (Italian lira since 1897); Liechtenstein (Swiss franc since 1921); Vatican City (Italian lira since 1930).Google Scholar
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    ‘Crawling peg’ currencies or in more recent time ‘crawling band’ currencies of South America (like those of Brazil, Chile, and Mexico) have not been taken into account.Google Scholar
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    See, for instance, the survey in IMF, World Economic Outlook, May 1998, chapter 4.Google Scholar
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    However, this distinction is not fully comparable or even analogical with the separation between tradable and non-tradable goods. Non-tradable goods are not subject to international price competition, while bank loans are exposed to an international interest-rate competition in a financially open economy.Google Scholar
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    ‘,.. a bank run in our model is caused by a shift in expectations, which could depend on almost anything, consistent with the apparently irrational observed behavior of people running on banks.’ Douglas W. Diamond and Philip H. Dybvig, ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy,vol. 99, June 1983, p. 404. See also Demirgüç-Kunt and Enrica Detragiache, ‘The Determinants of Banking Crises in Developing and Developed Countries’, IMF Staff Papers, vol. 45, March 1998, p. 83.Google Scholar
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    The schedule PO should have been drawn as a rectangular hyperbola to the extent that one defines the price level as P = PNaPTb where a (b) represents the weight of non-tradable (tradable) goods within total goods. For sake of simplicity, the schedule Po has been drawn as a straight line assuming a = b = 0.5 (or by using implicitly a non-weighted average between PN and PT). See the later Box 1.Google Scholar
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    Thus, the relative fall in PN will be greater than the relative fall in P and M (the quantity of money), respectively. If non-tradable goods make up half of total goods (a = 0.5), and a real depreciation rate of 20 percent is required for q, the general price level has to fall by 10 percent. The rate of monetary contraction will be lower (10 percent) than the rate of the real depreciation.Google Scholar
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    A ‘non-inflationary solution’ of a nominal devaluation would be point C1 for the price level at P1 (compare point B with C1). The rate of the real depreciation is higher than the rate of the nominal depreciation. It results from an increase in PT (via E) and from a fall in PN. See Box 1 and Emil-Maria Claassen, Global Monetary Economics, Oxford University Press, 1996, p. 105.Google Scholar
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    We have excluded the new member country Guinea-Bissau (1 million inhabitants) which joined the West African Monetary Union in May 1997.Google Scholar
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    The optimum size of a country, from an economic point of view, has been analyzed by Alberto Alesina, Enrico Spolare and Romain Wacziarg, ‘Economic Integration and Political Disintegration’, National Bureau of Economic Research, September 1997, and by Alberto Alesina and Enrico Spolare, ‘On the Number of Size of Nations’, Quarterly Journal of Economics, November 1997.Google Scholar
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    By letting out the other option of a fundamentally independent monetary policy in terms of a floating exchange rate for the CFA Franc.Google Scholar

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© Springer Science+Business Media New York 2000

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  • Emil-Maria Claassen

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