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Remittances are expected to affect domestic investment, among others, through induced rise in savings and easing of financial constraints. However, the empirical evidence on the relationship between the two variables is rather thin, especially in the context of Africa. This study investigates the short-run and long-run effects of remittances on domestic investment in four African countries using the bounds testing approach to cointegration analysis. The findings of the study indicate that whether remittances spur domestic capital formation varies by country and the time horizon considered, highlighting, among others, the importance of identifying the factors that tend to condition their relationship.

This paper tests the hypothesis of a negative relation between openness and inflation in the context of African countries. A dynamic model of inflation in which openness enters alternately as an endogenous and exogenous variable is estimated with different panel data estimation procedures. The paper finds no robust evidence that openness served as a mechanism to restrain inflation in the region. On the contrary, the results suggest that increased openness, treated as an endogenous variable, is associated with higher inflation on holding constant such factors as food supply constraint and level of economic development which are found significant co-determinants.The link between inflation and openness has been the subject of numerous empirical studies. This section first outlines the channels through which openness is expected to influence inflation and then provides a brief survey of the related empirical literature. 2 Economic theory suggests several explanations for the hypothesized negative relationship between openness and inflation under certain assumptions. The major explanations are summarized as follows.Effect through greater availability of cheaper imports: Increased access to cheaper foreign goods (due to removal or reduction of trade barriers, such as tariffs and quantitative restrictions) lowers the cost of the consumption basket which is likely to increasingly comprise imported goods as the economy becomes more open. Also, the prices of domestically produced goods are liable to decrease not only from the competition from cheaper foreign final goods but also due to lower production costs resulting from lower input prices. These include cheaper intermediate imports and lower nominal wage demands, the latter arising from the lower cost of the consumption bundle. The higher the proportion of imports in the consumption basket, the greater the use of imported intermediates, and the higher the degree of nominal wage flexibility and of substitutability between domestically produced and imported goods, the greater the disinflationary effect is expected to become. In addition, as economies become more open and integrated into world markets, the threat of global competition weakens the market power of firms and of workers, putting downward pressure on domestic inflation (Rogoff, 2003).Effect via induced efficiency, productivity gains, and output growth: Increased openness is argued to reduce allocative inefficiency and to enhance productivity and economic growth. The heightened competition resulting from greater openness is expected to improve the allocation of resources among different sectors of the economy as countries move to engage in activities in which they have comparative advantage and as the composition of inputs used (imported versus domestic) changes. Greater openness might lead to productivity growth if it was, among others, to facilitate the transfer of technical knowledge, induce innovativeness, and promote dynamic efficiency (Grossman and Helpman, 1991; OECD, 1998;Edwards, 1998). Faster productiv...

Purpose The purpose of this study is to examine the temporal relationships between inflation and exchange rate changes and their implications for the trade balance in Uganda, which saw persistent trade deficits, rising inflation and disinflation episodes, as well as significant exchange-rate realignments and other liberalization measures over the sample period considered. Design/methodology/approach The short-run dynamics of the variables in question and the pattern of their long-run relationships are examined applying the bounds testing approach to cointegration on quarterly data. Findings The estimates suggest that, in the long run, a real depreciation leads to an increase in inflation; and that both real depreciation and inflation exert no significant effect on the trade balance. The estimated short-run dynamics suggest a causal relationship between the trade balance and the real exchange rate and between the real exchange rate and inflation, which is also found responsive to developments in the foreign sector. Taken together, the short-run and long-run multipliers seem to provide a weak support for the J-curve effect, while no evidence is found for the presence of the S-curve effect. Originality/value The study sheds light on the relationship among real exchange rate, inflation and the trade balance in the context of a small developing economy; it highlights that an improvement in the trade balance requires more than an appropriate exchange rate policy and underscores the importance of other policies in strengthening the external sector of the economy.