Modelling macroeconomic shocks in the CFA Franc Zone

In this paper, we modify the method of Blanchard and Quah [American Economi c Review 79 (1989) 655] in order to estimate a structural VAR model appropr iate for a small open economy. In this way, we identify shocks to output an d prices in the members of the two monetary unions that make up the African CFA Franc Zone. The costs of monetary union membership will depend on the extent to which price and output shocks are correlated across countries and the degree of similarity in the long-run effects of the shocks on the macr oeconomy. The policy conclusions depend on the relative importance of diffe rent macroeconomic variables to policymakers and the speed with which a pol icymaker is able to respond to a shock. (C) 2001 Elsevier Science B.V. All rights reserved.