Pegged currency and trade performance : a case study of Cameroon's cotton exports Public Deposited

http://ir.library.oregonstate.edu/concern/graduate_thesis_or_dissertations/ns0648967

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  • Since its creation in 1948, the African Franc Zone currency (the CFA franc) was pegged to the French franc at an unchanged fifty to one parity. This study examines the trade effect of this fixed exchange rate on the Franc Zone's member countries. Cameroon cotton exports is considered on a case study approach. Two non-Franc Zone countries, Turkey and Tanzania are included in the analysis for comparison purpose. An econometric model for cotton exports was estimated for each of the three countries using the Seemingly Unrelated Regression (SUR) Method. The fluctuations of the CFA franc are not shown to have stimulated or impeded Cameroon's cotton exports in a systematic way which can be captured in the present quantitative analysis. Thus the research supports neither the position that the pegged currency helps exports performance nor the position that it causes harm. Contrary to theoretical expectation, Cameroon's cotton export is shown to be negatively related (and significantly so) to the world prices, suggesting that Cameroon's cotton trade is not consistent with the assumed revenue maximizing behavior. In strong contrast to Cameroon's results, but in agreement with theoretical expectation, the evidence for Turkey and Tanzania suggest that their cotton exports were affected by their real exchange rates and the world prices. One possible explanation for the apparent neutrality of the exchange rate for Cameroon is the prominent (but declining since 1985) role that France played as an importer of the Cameroonian cotton. Over the sixteen years study period. Linking of the economies through such trading relationship is one of the expected outcome of the monetary alignment. Discussion regarding the desirability of such a strong linkage to France's econony may be fruitful, particularly given the changes taking place in Europe.
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