Exchange Rate Arrangements in the Transition to East African Monetary Union

This report considers alternative exchange rate arrangements for EAC countries in the transition to a monetary union.  Four main considerations shape our analysis.  First, while existing exchange rate policies differ in some important ways across the EAC, the Partner States have expressed a desire to achieve a common exchange rate policy during the transition to union.  Second, since the transition period is of uncertain duration, the exchange rate arrangements adopted during the transiton should be consistent with macroeconomic stabilty and financial development on a country-by-country basis.  Third, the exchange rates at which national currencies are converted to the new union-wide currency should be consistent with macroeconomic stability, both in the final run-up to union and in the first few years of union.  Finally, the transition period should be long enough to lay the institutional groundwork for a successful and durable monetary union.