The determinants of exchange rate flexibility and the theory of optimum currency areas : an application to SADC.

Abstract

This study has its foundation on a model developed by Holden, Holden and Suss

(1979). The model is on the determinants of the flexibility of an exchange rate.

These determinants are: the openness of an economy; the level of economic

development; the diversification of the external sector; geographical

concentration of trade; the mobility of capital and the inflation differential.

In the present study, the model by Holden, et al is adapted in order to determine

whether SADC forms an optimum currency area or not. SADC has a number of

objectives which it aims to achieve. One of these objectives is the formation of a

monetary union in the future. This is the widest objective for SADC and the path

towards achieving this is the establishment of a Trade Protocol that aims to form

a Free Trade Area in the region.

A number of criteria have to be assessed in order to determine whether SADC

does form an optimum criteria or not. The Holden et. al model forms the basis for

this assessment. The model reveals that SADC does not form an optimum

currency area. SADC has not yet converged on the criteria for a monetary union.