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THE BENEFITS AND COSTS OF MONETARY UNION IN SOUTHERN AFRICA: A CRITICAL SURVEY OF THE LITERATURE

George S. Tavlas
Bank of Greece

ABSTRACT

With the 14 members of the Southern African Development Community (SADC) having set the objective of adopting a common currency for the year 2018, an expanding empirical literature has emerged evaluating the benefits and costs of a common-currency area in Southern Africa. This paper reviews that literature, focusing on two categories of studies: (1) those that assume that a country’s characteristics are invariant to the adoption of a common currency; and, (2) those that assume that a monetary union alters an economy’s structure, resulting in trade creation and credibility gains. The literature review suggests that a relative-small group of countries, typically including South Africa, satisfies the criteria necessary for monetary unification. The literature also suggests that, in a monetary union comprised of all SADC countries and a regional central bank that sets monetary policy to reflect the average economic conditions (e.g., fiscal balances) in the region, the potential losses (i.e., higher inflation) from giving up an existing credible national central bank, a relevant consideration for South Africa, could outweigh any potential benefits of trade creation resulting from a common currency.

Keywords: South African Development Community, monetary union, optimum currency areas.

JEL classification: E42; E52; F36

Acknowledgements: This paper was written while the author was Visiting Research Fellow at the South African Reserve Bank. The author would like to thank seminar participants at the South African Reserve Bank for constructive comments. The author is also grateful to Harris Dellas, Stephen Hall, Heather Gibson, Paul Masson, Pavlos Petroulas, Michael Ulan for many helpful comments. The views expressed are those of the author and should not be interpreted as those of the Bank of Greece or the South African Reserve Bank.

Correspondence:

George Tavlas,
Economic Research Department,
Bank of Greece, 21 El. Venizelou St.,
102 50 Athens, Greece,
Tel. +30210-320 2370
Fax +30210-320 2432
Email: gtavlas@bankofgreece.gr


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