Dynamics of Monetary and Fiscal Policy in the Franc CFA Zone: A Review of the Literature
Abstract
The effectiveness of monetary and fiscal policy within a monetary union has come under increasing scrutiny in recent years, particularly in the context of complex and overlapping global crises and economic shocks. This is especially true for African countries, whose economic challenges have long been associated with monetary dependency. This paper focuses on the dynamics of monetary and fiscal policies in the CFA Franc zone, which comprises two groups of West and Central African countries that share a common currency pegged to the euro and operate under a unified central bank. Specifically, it examines whether monetary policy has been effective in addressing supply and demand shocks in the markets. The paper conducts a systematic review of the literature from 1980 to 2023. Both theoretical and empirical studies are examined. Additionally, we discuss the instruments and effectiveness of monetary policy in the Franc zone, along with the challenges and prospects for its future evolution. The literature generally suggests that the Franc Zone has achieved a certain level of macroeconomic stability and convergence; however, it also faces significant constraints regarding its monetary autonomy and fiscal policy coordination. There is substantial evidence indicating that monetary policy in the Franc Zone is largely passive, and the region lacks the characteristics of an optimum currency area that would enhance its effectiveness. We propose several potential reforms to enhance the performance and resilience of the monetary union, including strengthening its institutional framework, diversifying its economic structure, and deepening its financial integration. Additionally, we recommend that future studies explore reforms aimed at making the CFA Franc an optimal currency area, as well as examining the autonomy thesis within the Franc zone.
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