Exchange Market Pressure in the Central African Economic and Monetary Community (CAEMC) Area: Empirical Assessment of the Macroeconomic Determinants

ABSTRACT

The current empirical study contributes to the literature on the exchange market pressure. First we construct as proposed by Eichengreen, Rose, and Wyplosz [1996. Contagious currency crises: First tests. The Scandinavian Journal of Economics, 98 (4), 463–484], a continuous measure of EMP for the CAEMC franc zone, using quarterly data from 1985Q1 to 2012Q2. We then address the main macroeconomic determinants of this EMP.

We find that our main measure for EMP as well as two alternative measures of this index captures quite well episodes of crises of the CFA (XAF) currency. During the period of study, the common currency of the CAEMC countries experienced about four speculative attacks, with the one in 1993 ending with the devaluation of that currency in January 1994. The other attacks were warded off through reserves losses, as it is clear that the currency peg was maintained principally through changes in reserves. We also find that the GDP growth, the trade balance and the international oil price are the main contributors of EMP and therefore the most significant predictors of currency crises in the CAEMC area.

KEYWORDS:

• Exchange market pressure
• currency crisis
• speculative attack
• international reserves
• CFA franc zone

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

1 Throughout the study, CFA franc stands for as the Central African CFA franc (XAF), one of the two currencies that are part of the franc zone and therefore are guaranteed by the French Treasury.

2 The West African Economic and Monetary Union (WAEMU) includes eight nations namely Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo.

3 The Central African Economic and Monetary Community (C.A.E.M.C) links together six countries (Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea and Gabon).

4 Klaassen and Jager (2011) use a generalized Taylor rule approach to derive the counterfactual interest rate. As a consequence, a first approximation of the interest rate component in the EMP would be the nominal interest rate differential. This component could be refined by adding the inflation differential to the interest rate differential; and further accounting for cross-country gap differences.

5 Studies include among others, Connolly and Da Silveira (1979), Kim (1985), Burdekin and Burkett (1990), and Wohar and Lee (1992).

6 Authors in empirical researches use various money stocks to scale international reserves. The monetary model advocates the use of monetary base to deflate reserves while Eichengreen et al. (1996) propose using narrow money (M1) to scale international reserves. This measure can also be used in cases which monetary base is not available (see Aizenman & Binici, 2015). Finally, Hegerty (2009) considers the M2 aggregate as the money supply in the computation of EMP.

7 Due to their poor performance, results of the models using EMP2 are not shown in the text, but are available on request from the author.

Additional information

Notes on contributors

Michel Cyrille Samba

Dr Michel Cyrille Samba was born in 1972 in Nkoumadjap 2 in Cameroon. After his GCE A Level at the Modern and Classic High School of Sangmelima (Cameroon), he studied at the University of Yaoundé 2 where he obtained a Master's degree in Macroeconomics in 2001. He earned a PhD in Economics and Finance in 2011 at the Shanghai University of Finance and Economics, China. He is now a Senior Lecturer at the University of Yaoundé 2. He is also currently serving as the Deputy Director of the Higher Technical Teachers' Training College (HTTTC) of the University of Yaoundé 1.