The Future of the CFA Franc: A Game Theory Approach

Abstract

Aims: Based on the theory of non-cooperative games, this paper aims to determine whether the African Franc Zone (AFZ) countries should leave or remain in monetary cooperation with France. Methodology: Empirically, we implement a non-cooperative game pitting France against the AFZ countries. The strategies defined for the two players are "Maintain (M)" and "Exit (E)." The potential benefit is the preservation of the pooling of 50% of the AFZ countries' foreign exchange reserves in the French Treasury. Results: Using Nash equilibrium, the study analyzes strategic decisions in monetary cooperation. At the end of technical manipulations, we obtain two results based on two assumptions: (i) Assuming that the AFZ is the first player, and the decision being taken by political leaders without consulting the other sociological components, the optimal solution would be (M, M), reflecting the preservation of 50% of foreign exchange reserves within the French Treasury; (ii) Then, when the leaders of the AFZ countries incorporate the will of the people and the aspirations of the African Union, we arrive at two Nash equilibria, (E, E) and (E, M) respectively, giving gains of 50% for the AFZ and 0% for the French Treasury, significantly implying an exit decision for AFZ countries. These results show that, beyond the positions of technocrats and leaders, the people's will is a determining factor in the economic and monetary conditions of a country or group of countries. Conclusion: However, these equilibria could be sensitive to the order of the game (who plays first), political shocks such as coups d'état, types of threat, grouped or solitary exit strategies, but also to the bargaining power of the players, mixed-strategy equilibrium and external geopolitical influences. The countries of the AFZ need to strengthen their monetary sovereignty by reforming cooperation mechanisms with France, while also incorporating the aspirations of their populations into the decision-making process. This will promote a more legitimate and contextually relevant monetary policy that aligns with current economic and social realities.