Introducing a Common Currency in Central Franc Zone: Is it Appropriate?

This article examines the suitability of the currency union in the Central Franc Zone (CFA) relative to business cycles and trade. Optimum currency area (OCA) criteria have been employed to determine the suitability of currency integration. This paper also develops a procedure for application of OCA theory to CFA and examines the criteria, taking into account the endogeneity among variables. Establishment of a currency union and elimination of nominal exchange rate variability may result in large gains in active trade flows and convergence of business cycles. Adoption of the Euro is preferable to the dollar for each CFA country.