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Testing the ‘fear of floating’ hypothesis: a statistical analysis for eight African countries

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posted on 2019-08-20, 07:43 authored by Ahmad Hassan AhmadAhmad Hassan Ahmad, Eric PentecostEric Pentecost
This paper revisits the fear of floating hypotheses for eight African countries from the collapse of the Bretton Woods fixed exchange rate system in the early 1970s up until December 2017. This long period of calendar time allows us to extend previous studies by examining the fear of floating hypotheses in two distinct ways. First, we look at a set of descriptive statistics to compare the degree of exchange rate flexibility under alternative dejure exchange rate regimes. We find no statistical difference between exchange volatility between declared floaters and fixers, but greater reserve volatility between the floaters, which is suggestive of fear of floating. Second, we use a non-linear, threshold VAR model, estimated for each country, to test for a relationship between exchange rate changes and reserve changes. The results suggest some evidence of a fear of floating for countries which have declared a de jure floating regime, with the regime-dependent impulse responses indicating that exchange rate appreciation due to positive reserve shocks is more prevalent in the high reserve regimes, indicative that level of foreign reserves available are important for their exchange rate policies. In general, although the countries with de jure floating regimes have a lower threshold than those with pegged regimes, reserves adjust by more than the exchange rates showing a fear of floating.

History

School

  • Business and Economics

Department

  • Economics

Published in

Open Economies Review

Volume

31

Pages

407–430

Publisher

Springer (part of Springer Nature)

Version

  • VoR (Version of Record)

Rights holder

© the Authors

Publisher statement

This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.

Acceptance date

2019-06-11

Publication date

2019-12-20

Copyright date

2020

ISSN

0923-7992

eISSN

1573-708X

Language

  • en

Depositor

Dr Ahmad Hassan Ahmad

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