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Journal of African Economies Advance Access originally published online on April 9, 2008
Journal of African Economies 2008 17(4):600-634; doi:10.1093/jae/ejm043
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© The author 2008. Published by Oxford University Press on behalf of the Centre for the Study of African Economies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Estimating Equilibrium Real Exchange Rates in the Franc Zone

Simeon Coleman*

Department of Economics, University of Leicester, Leicester LE1 7RH, UK

* Corresponding author: Simeon Coleman, Department of Economics, University of Leicester, Leicester, LE1 7RH, UK. Tel: +44 (0)116 252 5369; fax: +44 116 252 2908. E-mail: sc126{at}le.ac.uk

This paper estimates the degree of real exchange rate misalignment in 12 CFA (Communauté Financière Africaine) franc zone countries over the period 1960–99. Allowing for contemporaneous error co-variances, due to observed cross-sectional dependence, we use seemingly unrelated regressions equation estimations to estimate the equilibrium real effective exchange rate and degree of misalignment in each country. We find significant differences across member-states, however, the largest economies—Cameroon, Côte d'Ivoire and Senegal—showed some striking similarities. Just prior to the 1994 devaluation, these three economies were much more overvalued compared with the smaller member-states, some of which were either marginally misaligned or virtually in equilibrium. In 1994, only Côte d'Ivoire is exactly in equilibrium as a result of the devaluation. Our analysis of misalignment for the period after 1994 suggests that some challenges lie ahead for the CFA franc zone, if fixed parity is to be maintained.

JEL classification: C33, F33, F42, P47


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