Devaluation and cattle market integration in Burkina Faso

The aim of this paper is to highlight an aspect of devaluation that is generally ignored in the literature, namely its positive impact on the integration of domestic markets of tradable goods. The analysis applies to cattle markets in Burkina Faso where cattle is both a tradable and a capital good that can be held inter-temporally. We develop an exogenous switching regime regression model consistent with spatial and inter-temporal arbitrage conditions which categorise markets in two regimes: autarkic and integrated. When markets are autarkic, prices follow a random walk. Conversely, when two markets are integrated, their prices are closely correlated. The switching between the two regimes is driven by transaction costs which are supposed to be a function of the real effective exchange rate, among other variables. Devaluation is shown to have a negative impact on real transaction costs and thus to promote cattle market integration.