On the economic desirability of the West African monetary union: Would one currency fit all?

This paper investigates whether the West African nations will benefit from forming the ECO currency union. Using data from 15 countries over the 1999–2018 period, we assess heterogeneity between economies in terms of equilibrium exchange rates —i.e., the level of exchange rates consistent with the absence of macroeconomic disequilibria. Then, we address the sustainable exchange rate regime issue by evaluating whether the ECO should be pegged, freely floating, or something in between. We identify two homogenous groups of economies and find that neither a single currency peg nor a freely floating exchange rate regime would be preferable for any country or group of economies. Overall, our findings argue in favor of two ECOs, one for each of the two identified zones. Each ECO would serve as a virtual anchor for the considered group and would be determined by a basket of currencies mainly composed of euro and US dollar. •We investigate the desirability of the West African monetary union project, ECO.•We identify two relatively homogeneous subgroups of countries within the region.•Neither a single currency peg nor a freely floating exchange rate regime is preferable.•Two ECOs are desirable, i.e., one for each of the two identified zones.•ECOs should be pegged to a basket mainly composed of euro and US dollar.