Fixed exchange rates trade employment stability for external balance

Evidence

It is widely accepted that a fixed exchange rate regime tends to determine a low level of inflation. Conversely, a flexible exchange rate regime causes a bit more inflation, but promotes a greater stability in terms of economic activity: it has a cushioning function that makes it possible to react to shocks and significantly reduce the volatility of (changes in) production and employment, something which a fixed exchange rate doesn’t allow for. If a country wants to give priority to the stability of production and employment, then it has to adopt a flexible exchange rate regime. If, on the other hand, it chooses to favour a balance of payments equilibrium, or external balance, then a fixed exchange rate can help. The tragedy is that the countries of the franc zone not only give priority to the external balance over every other consideration, but they think that this goal consists solely in maintaining the fixed parity at all costs. The central banks of the CFA system, for example, do not seem interested in improving the price competitiveness of their member states’ economies. As a result, in the WAEMU area, all countries with the exception of the Ivory Coast have experienced a chronic trade deficit since their independence. — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 295

Categorization

• DEFINE: Explains the fixed-vs-flexible regime trade-off between employment stability and external balance — key mechanics.
• XREF: connects to: Fixed exchange rates force austerity when competitiveness declines; Fixed and floating exchange rates operate by opposite logics — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 121; A fixed exchange rate regime forces member countries to resort to internal devaluation — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 125 (+5 more)

Related

• Fixed exchange rates force austerity when competitiveness declines (similarity 0.91)
• Fixed and floating exchange rates operate by opposite logics (similarity 0.87)
• CFA ‘stability’ masks currency fluctuation against dollar and pound (similarity 0.85)
• A fixed exchange rate regime forces member countries to resort to internal devaluation (similarity 0.83)
• Reformers demand flexible exchange rates and growth-oriented central bank policy (similarity 0.82)
• CFA critics demand flexible exchange rates, development-oriented central banks, and banking reform (similarity 0.81)
• Devaluation and revaluation simply shift the fixed CFA-euro parity (similarity 0.81)
• Fixed exchange rate countries in sub-Saharan Africa grow 1-2 points slower (similarity 0.81)
• CFA franc parity was frozen at 50 per French franc from 1958 to 1994 (similarity 0.79)
• Franc-zone central banks must restrict domestic credit to defend the fixed euro parity (similarity 0.78)
• CFA franc parity changed only once since 1948 (similarity 0.78)
• Currency independence alone cannot succeed without a self-centred development model (similarity 0.78)

Broader Connections

• CFA critics demand flexible exchange rates, development-oriented central banks, and banking reform #responds-to (0.55) — Fanny Pigeaud_ Ndongo Samba Sylla, Africa’s Last Colonial Currency, 323