Long-Run Real Exchange Rate And Key Macroeconomic Indicators In WAEMU

A monetary union seeks the economic development and the increase inwell-being of the member states. In the West African Economic and MonetaryUnion, this goal is achieved by common monetary policies and convergencecriteria. Even though this union shares the same fixed nominal exchange rate,the differences in the standard of living cannot be ignored and reflect in thereal exchange rate. The real exchange rate is a dynamic variable whosemobility is determined by factors such as the economic growth, the inflationrate, the interest rate.For a sustainable monetary union, similarities in the economic structureof member countries are not only necessary but also important for a relativelyequitable distribution of net benefits from integration. The proc ess of makingthese economies similar is called convergence. Indeed, it is viewed that largedifferences in economic growth, inflation rates, among members would makemonetary integration difficult. This research analyzes the long-termrelationship between the real exchange rate and major macroeconomicvariables. We verified the plausible Co-integration between the exchange rate,the inflation level, the interest rate and the economic growth. The empiricalstudy is based on the Co-integration and Vector error correction models overthe period1980-2009for five countries in WAEMU.The results showed the existence of one long-term relationship for threeof the countries studied and two long-term relationships for the others.Furthermore, we find that the effect of macroeconomic indicators on the realexchange differ greatly from one country to the other, pointing out the issueof convergence and homogeneity in the WAEMU.