Choice of Exchange Rate Regime in a Selection of African Countries

Abstract

An exchange rate regime has an important impact on macroeconomic policies within developing countries and therefore essential in macroeconomic policy formation. The main research question is to determine how the variety of determinants would influence the exchange rate regime choice for a selection of 19 African developing countries. A distinction is made between three groups of variables, namely economic fundamentals, economic stabilisation aspects and currency crises factors, all affecting a country's exchange regime choice. The probability of these determinants is then estimated to establish whether the selected countries would choose a fixed, an intermediate or a flexible exchange regime.

The Determinants of Optimal Exchange Rate Regimes in High and Low Oil-Producing Countries

“…For advanced and low-income economies, the level of capital controls, inflation differential and land size significantly influenced the regime choice but were largely insignificant factors in emerging markets. Jordaan (2015) studied the variables that determine the type of exchange rate regime in African countries and found that a flexible exchange rate is most likely associated with economic development, the level of openness, the rate of inflation, real exchange rate volatility, the level of foreign reserves and the current account balance.…”

“…Variables determining exchange rate regime and expected sign of coefficient and significance towards a likelihood of applying a fixed exchange rate regime BMTOGDP: Broad money (% of GDP) Bornukova (2004), Jordaan (2015), Mundell (1961), OCA theory…”

“…Negative and significant BMGROWTH: Broad money growth (annual %) Jordaan(2015), Mundell (1961), Guclu (2008) Negative and significant INF: Inflation, consumer prices (annual %) Mundell (1961), Jordaan (2015), Boyer (1978, Edwards(1996); Collins (1996), Edwards (1996), Rizzo (1998) Ambiguous CA: Current account balance (BoP, current US$) Bornukova (2004), Mundell (1961) Negative and significant CAPGDP: Current account balance to GDP % Jordaan (2015), Mundell (1961) Negative and significant TRES: Total reserves (includes gold, current US$) Mundell (1961), OCA theory…”

“…Negative and significant BNTOTR: Broad money to total reserves Jordaan (2015), Mundell (1961) Negative and significant TBM: Total broad money Mundell (1961) Negative and significant 2014), Klein and Sahmbaugh (2009) Positive and significant DUMOIL: Dummy Oil http://www.eia.gov/ Aliyev (2014), Klein and Sahmbaugh (2009) Positive and significant *Ambiguous; refers to a variable that can have a positive or a negative sign to the likelihood of having a fixed exchange rate, the significance and size of coefficient varies from one empirical study. For more details, refer to Papaioannou, (2003) *and ** denote 1% potential multicollinearity, they are used individually to estimate the models for each of dependent variables.…”

Forecasting Value at Risk and Expected Shortfall of Foreign Exchange Rate Volatility of Major African Currencies via GARCH and Dynamic Conditional Correlation Analysis

“…Remarkably, research on the exchange rate volatility and dynamic conditional correlation analysis of financial market interdependence has focused on the financial markets in developed countries. Little attention has been paid to the exchange rate volatility of emerging economies, especially African countries, for example, see Karanasos et al ( 2022 ), Niyitegeka and Tewari ( 2020 ), Carsamer ( 2015 ), Jordaan ( 2015 ), Raputsoane ( 2008 ), Yonis ( 2011 ), Emenike ( 2018 ) and Mohammed et al ( 2021 ). Even the few papers appear to be limited in their scope.…”