Improving Policy Credibility: Is There a Case for African Monetary Unions?

This paper analyses the experience with monetary policy in African countries which have participated in rule-based international monetary arrangements (CFA Franc Zone, Eastern African Currency Board and Rand Monetary Area). It argues that African countries have generally lack the political institutions necessary for governments to credibly commit through domestic institutions (exchange rate pegs or independent central banks). For such countries, monetary unions can provide an alternative source of credible commitment to sound macroeconomic policies, but only when exit from a union is made costly by the existence of parallel regional accords, and only when governance structures of monetary unions have been designed so as to maximise chances for the enforcement of monetary rules.