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date: 19 October 2019

Abstract and Keywords

This chapter considers whether the “monetary geography” of Africa—that is, the pattern of currency use—is likely to change in coming decades. In particular, it examines existing monetary unions, assessing their viability and the scope for expanding them, and also considers proposed new monetary unions. A model is presented that quantifies the benefits of monetary union membership, which are set against the traditional costs due to asymmetric shocks, augmented with another type of cost, namely fiscal asymmetries. The model assessment finds that existing monetary unions seem economically viable, but points out that relatively low regional trade and strong shock and fiscal asymmetries limit the scope for welfare-enhancing new or expanded monetary unions. This conclusion is reinforced for proposed unions of oil exporters and oil importing countries. Lessons from Europe suggest that the institutional requirements for successful monetary unions are more demanding than earlier thought.

Keywords: monetary geography, currency unions, trade, financing need, fiscal asymmetry, shock asymmetry, optimum currency area, CFA franc, East African Community

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