The West African Economic and Monetary Union: Optimality Revisited

The debate has been reignited in recent months by both defenders and opponents of the CFA franc, about its benefits or the lack thereof. The objective of this paper is to join the conversation in an objective, and quantifiable way, by investigating the optimality of the currency area. A trivariate SVAR comprising world output, domestic output for each one of the eight countries that make up the West African Economic and Monetary Union (WAEMU), and changes in their price levels, represented by their respective CPIs was estimated. Annual data ranging from 1980 to 2017 was obtained from the IMF 2017 World Outlook. I also investigated endogeneity within the Union, by dividing the data into two samples, one from 1980 to 1993, a period that predates the WAEMU, and one from 1994 to 2017. The results show more synchronization of business cycles during the second period than during the first. I examined the role of trade in the near perfect synchronization of business cycles in the WAEMU, and found it to be the driving force behind the symmetry.