The paper studies the role of real exchange rates and exchange rate policies in
explaining differences in the economic performance in the CFA franc countries,
with their fixed exchange rate regime, and another group of countries in
Sub-Saharan Africa with more flexible arrangements. Policy-makers in
inflation-prone countries are faced with a permanent dilemma: should policy
priority be given to containing inflation or to maintaining competitiveness
through currency depreciation. This policy conflict tends to be aggravated by
the fact that in both country groups devaluations seem to have a positive
impact on economic activity, throwing doubt on previous work on possible
contractionary effects of devaluations. Even so, the question as to whether the
pegging of an exchange rate is advantageous, when taking account of both output
and inflation effects, remains open, as it partly depends on the supply shocks
to which the countries are exposed.