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

This paper analyzes experience with monetary policy in Africa, focusing on countries that have participated in rule-based regional monetary agreements (CFA Zone, East African Currency Board and Rand Monetary Area). We show that African countries have generally lacked the political institutions necessary for governments to commit credibly on an individual basis to financial stability. We argue that monetary unions can provide an alternative means of credible commitment to sound macroeconomic policies, but only under certain conditions. First, exit from a union must be made costly by the existence of parallel regional agreements and/or links to the financial and technical assistance of industrial countries; second, governance structures of monetary unions must be designed so as to maximize chances for enforcement of monetary rules; and third, if a state seeks to break the rules of a union, other member governments must actively oppose such attempts