Choice of Monetary and Exchange Regimes in ECOWAS: An Optimum Currency Area Analysis

Author: 
Chantal Dupasquier
Patrick N. Osakwe
Shandre M. Thangavelu
Description: 
Paper No. 2005/10 - Jul 2005
JEL codes: 
Organisation: 
Abstract: 
There are plans by five West African countries to establish a second monetary zone in the sub-region by December 2009. In this paper we ask whether a monetary union is the appropriate exchange rate regime for the sub-region based on economic criteria. We address the issue using a rigorous theoretical framework that captures the crucial trade-off between the savings in transaction costs, resulting from a common currency, and the macroeconomic stabilization benefits of a flexible exchange rate regime. The main result is that a flexible exchange rate regime dominates a monetary union in the ECOWAS sub-region.