chapter  2
CFA membership, exchange rate pegs and inflation
Pages 24

The CFA's adherence to a fixed exchange rate removes one degree of freedom in monetary policy. Given that its members are small open economies and price-takers on world markets, the CFAF prices of tradable goods (and hence the corresponding inflation rates) are given. This is not necessarily a disadvantage: there is a body of macroeconomic theory that predicts that pre-commitment to a fixed exchange rate will help in reducing inflation. Monetary policymakers in countries in which such a pre-commitment is absent will not be able to achieve inflation rates as low as those adhering to a fixed exchange rate. In this chapter we will first review the theoretical foundation for this idea, and then outline an empirical model that will allow us to investigate whether there is any evidence whether exchange rate pegs in general - and the CFA in particular - help in reducing inflation.