An empirical investigation of African exchange rate policies

This thesis examines exchange rate policies in Africa, using data from 1980 to 2005. Africa's economic growth failure has been characterised as a 'disaster'. Among the identified culprits are inappropriate exchange rate policies. For a quarter of a century now, African economies have introduced exchange rate based stabilization programmes to restructure their economies. The thesis used different empirical techniques to investigate various aspects of exchange rate policies in Africa. It first uses an econometric model along with statistical analysis to verify whether the countries practise what they report in terms of exchange rate regimes. The results corroborate other findings that countries' de jure regime could be different from de facto. Threshold cointegration analysis was used to explore long-run relationship between reserves and exchange rates. The results show that, after accounting for threshold effects, there is a long-run relationship between reserves and exchange rates in these countries. This supports the empirical technique of using reserve changes as indicators of exchange rate interventions in developing countries. Determinants of long-run real exchange rates were examined based on a trade relation model. The econometric methodology uses vector error correction mechanism (VECM), within which the traditional determinants of real exchange rates in developing countries are considered. The outcome indicates that these variables are significant in the countries considered. The thesis further investigates sources of real exchange rate fluctuations in a sample of African countries. The work was motivated by a stochastic open economy macroeconomic model and the econometric estimation was carried out within a trivariate structural VAR model. The findings suggest that demand shock accounted for most of the variations in real exchange rates. Supply shocks were, to a large extent, significant in countries whose supply-side reforms seem to be effective. Does exchange rate regime matter for terms of trade shocks in developing countries? This is what chapter seven explores. It investigates how African countries cope with terms of trade shocks under different exchange rate regimes. The results indicate that there is not much difference between countries with a floating regime and those with a fixed regime. A further investigation on exchange rate pass-through was undertaken and the findings indicate that exchange rate pass-through is very low in these countries, which could not induce 'expenditure switching'. Function of nominal exchange rates as an insulator of the real side of the economy is inhibited.