Nominal and real effective exchange rates for Southern African Development Community countries over the period 1980-2004: implications for the expansion of the Common Monetary Area

This paper computes both the nominal effective exchange rate (NER) and the real effective exchange rate (RER) for Southern African Development Community (SADC) countries for the period 1980-2004 with a view to identifying those countries that could join the Common Monetary Area (CMA) in the future. The NER and RER variations are used to analyse the suitability of non-CMA SADC countries for membership in the CMA. Variation in the NER suggests an expansion of the CMA to include Botswana and Malawi, while variation in the RER suggests an expansion of the CMA to Mauritius, Botswana and Seychelles. As suggested in the theory developed by Melitz, while the RER variation criterion should be more expansionist than variation in the NER, the RER-based expansion - as this study shows - does not necessarily include all countries suggested by the NER-based expansion.