An Empirical Analysis of the Franc Zone Using Optimal Currency Area Criteria

Abstract

This study examines the economic viability of the franc zone (CEMAC and UEMOA) in light of the theory of optimal currency areas (OCA) initiated by Mundell (1961). The main objective is to determine whether this monetary union constitutes a “union of convenience” inherited from history or an area that meets the criteria of economic efficiency. We seek to move beyond ideological debates through a quantitative empirical investigation of the zone's ability to absorb shocks without exchange rate adjustment. We adopt a mixed methodological approach combining descriptive analyses and advanced econometric (Hodrick-Prescott filters (De Jong et al., 2016), VAR/VARS models) tools over the period 1990-2024. The sample includes the 14 countries of the franc zone (8 from WAEMU: Benin, Burkina Faso, Ivory Coast, Guinea-Bissau, Mali, Niger, Senegal, Togo; 6 from CEMAC: Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea, Chad), compared to a control group (Nigeria and Angola) to isolate the effect of the exchange rate regime. Four canonical criteria are operationalized: factor mobility (analyzed via migration flows and foreign direct investment); trade openness (McKinnon) (measured by the ratio (Exports + Imports)/GDP); economic diversification (Kenen) (assessed by the Herfindahl-Hirschman Index (HHI) (Qu and Rhee, 2022)); and cycle synchronization and the nature of shocks (treated by Hodrick-Prescott filters (Cogley et al., 2013) and VAR/SVAR models). The results of our work show a lack of real convergence and inefficient labor mobility. The others results are as follows: successful nominal stability (unit root tests (ADF) confirm that inflation is stationary for all countries, demonstrating effective nominal anchoring thanks to pegging to the euro); high trade openness (the CFA franc zone is statistically more open than other groups of African countries, partially validating the McKinnon criterion); weak adjustment mechanisms (labor mobility does not function as a stabilizer; econometric models show that an increase in unemployment does not lead to significant emigration. Similarly, capital does not compensate for asymmetric shocks; the analysis reveals a strong dependence on raw materials, economic cycles are heterogeneous, and shocks are mostly asymmetric, making a single monetary policy suboptimal. Monetary system is suitable for all countries or all periods, whereas economic debates often tend toward radical positions, presenting fixed or floating exchange rates as absolute solutions to international monetary imbalances.  The study concludes that the franc zone does not, ex ante, meet the conditions for an optimal currency area. While it guarantees remarkable price stability, its architecture suffers from a lack of real convergence and an absence of compensatory fiscal mechanisms. The viability of the union therefore relies more on its institutional credibility and external anchoring than on intrinsic economic integration.