The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of São Tomé and Príncipe
IMF Working Papers, May 1, 2008
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- The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of São Tomé and Príncipe
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Bibliographic details
- Authors: Jian-Ye Wang, Nisreen H. Farhan, Amar Shanghavi, Márcio Valério Ronci, Misa Takebe
- Published: May 1, 2008
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451869781.001
Summary / Key Findings
- The paper assesses São Tomé and Príncipe's monetary and exchange rate arrangements in light of the country's monetary history and the relevant experience of comparable countries in Africa.
- Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float.
- The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency.
- It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement.
Structural Characteristics Highlighted
- Very small size.
- High degree of openness.
- Extensive use of foreign currencies.
- Inflexible product and factor markets.
Methodology and Analytical Approach
- Uses statistical methods combined with consideration of other factors to identify an appropriate anchor currency.
- Compares São Tomé and Príncipe's experience with relevant comparable countries in Africa.
Policy Implications and Recommendations
- Prefer firmly anchored currency arrangements (memberships in monetary unions or hard pegs) over a managed float for São Tomé and Príncipe.
- Emphasizes that fiscal discipline is a main prerequisite for adopting a firmly anchored currency arrangement.
- Emphasizes that prudent debt management is a main prerequisite for adopting a firmly anchored currency arrangement.