This paper suggests that while crawling peg exchange rates, whether active or passive, can be a valuable device for maintaining external balance in an inflationary environment, they may be inferior to a common currency area in a number of ways, particularly with respect to monetary stability and monetary integration. Evidence is presented on the stability of the French franc zone in West Africa and on the now defunct dollar zone in Latin America. When such zones exist without restrictive exchange controls, they should be preserved and strengthened. When they exist only de jure with strict exchange controls, adopting John Williamson's crawling peg solution is superior since it can accommodate the levying of the inflationary tax without causing external imbalance due to a failure to adjust the exchange rate.
ASJC Scopus subject areas
- Economics and Econometrics