Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting?

Abstract

This paper discusses the theoretical choice of exchange rate anchors in Sub-Saharan African countries that are facing external vulnerabilities. To reduce instability, policymakers choose among promoting external competitiveness using a real anchor, lowering the burden of external debt using a nominal anchor or using a policy mix of both anchors. We observe that these countries tend to adopt mixed anchor policies. We solve a state space model to explain the determinants of and the strategy behind this policy. We find that the choice of policy mix is a two-step strategy: First, authorities choose the degree of nominal exchange rate flexibility according to the velocity of money, trade openness, foreign debt, degree of exchange rate pass-through and exchange rate target zone. Second, authorities seek to stabilize the real exchange rate depending on the degree of trade integration with the rest of world and the degree of foreign exchange interventions. We conclude with regime-switching estimations to provide empirical evidence of how these economic fundamentals influence exchange rate policy in Sub-Saharan Africa.

The nonlinearity of exchange rate pass‐through on currency invoice: A quantile, generalized method of moments and threshold effect‐test from sub‐Sahara African economies

“…It is also believed that the findings are mainly explained following the gap created between theory and empirics within EPRT literature. Conversely, given the consideration of the studies Al Hajj, Dufrenot, & Keddad, 2018;Amoah & Aziakpono, 2018;Aron, Farrell, Muellbauer, & Sinclair, 2014;Frimpong & Adam, 2010;Kabundi & Mlachila, 2018;Razafimahefa, 2012), they are studies utilized on African data to explore the ERPT on either consumer prices or import price and exhibits contrasting effects of ERPT on prices. Nevertheless, their reviews have a limited focus on prices without looking into another aspect that is fundamental and could perhaps impact on ERPT.…”