Between Stability and Sovereignty: The Implications of the CFA Franc Adoption for Peripheral Economies in the Currency Hierarchy

Abstract

The current composition of the International Monetary System (IMS), following the dissolution of the Bretton Woods system, has changed significantly. In the past, the system was characterized by fixed exchange rates, strict capital controls, and general economic stability. However, recent decades have been characterized by financial deregulation and liberalization, with the gradual removal of capital controls and the widespread adoption of flexible exchange rates. As part of this reconfiguration of the IMS, the dichotomy between center and periphery has intensified: Developed countries have secured a dominant position within the global capital system thanks to their highly liquid reserve currencies, giving them the leeway to tailor economic policies to their domestic needs. Conversely, developing countries have become more vulnerable to external shocks and are subject to the volatility of exchange and interest rates in this asymmetric system (see, e.g., de Paula et al., 2017; Fritz et al., 2018; Palludeto & Abouchedid, 2016). These inequalities have been highlighted in the theory of currency hierarchies, a post-Keynesian framework. This theory posits that the IMS is determined by the exchange rate regime, the degree of capital mobility, and the currency hierarchy. The latter is based on the premise that not all currencies can efficiently perform the traditional functions of money – a unit of account, means of payment, and store of value – at the international level. The consequence is a liquidity hierarchy, with developing countries at the bottom of this pyramid (de Paula et al., 2017; Palludeto & Abouchedid, 2016).