Real Effective Exchange Rate Imbalances and Macroeconomic Adjustments: Evidence from the CEMAC Zone

Abstract

We assess the behavior of real effective exchange rates (REERs) of members of the

REER Imbalances and Macroeconomic Adjustments in the Proposed West African Monetary Union

“…On the other hand, external equilibrium is attained when the current account balance is at a “sustainable” threshold as implied by the sustainable level of capital flows. Consistent with the literature, long‐term determinants of the EREER are defined by the following fundamentals (Abdih and Tsangarides, ; Asongu, 2013c): ( i ) “productivity” with an expected positive sign that captures the Balassa–Samuelson effect ; ( ii ) the terms of trade (TOT) in goods with (also) an expected positive sign that captures the wealth‐effect ; ( iii ) “investment” (of an ambiguous sign), which is included in the theoretical model because of supply‐side effects that are dependent on the relative factor intensities across sectors ; ( iv ) “degree of trade controls/restrictions” for which the sign is ambiguous ; And ( v ) liabilities in terms of external debt that partially reflect fiscal policies…”

“…The FEER estimation strategy is particularly appropriate in examining if the movement of the REER represents a misalignment or whether the equilibrium real effective exchange rate (EREER) itself has shifted because of changes in the macroeconomic fundamentals (Abdih and Tsangarides, ). Accordingly, we define equilibrium as the rate that results in the simultaneous attainment of internal and external equilibrium in the economy (Asongu, 2013c). Thus, internal equilibrium is achieved when the market for non‐tradable commodities clears in the present (and expected to clear in the future) as wage and price flexibility ensure that demand equals supply ( i.e.…”

Reer Imbalances and Macroeconomic Adjustments in the Proposed West African Monetary Union

“…On the other hand, external equilibrium is attained when the current account balance is at a 'sustainable' threshold as implied by the sustainable level of capital flows. Consistent with the literature, long-term determinants of the EREER are defined by the following fundamentals (Abdih & Tsangarides, 2010;Asongu, 2013c …”

“…Accordingly, we define equilibrium as the rate that results in the simultaneous attainment of internal and external equilibrium in the economy (Asongu, 2013c). Thus, internal equilibrium is achieved when the market for non-tradable commodities clears in the present (and expected to clear in the future) as wage and price flexibility ensure that demand equals supply (that is, the conditions of internal balance are satisfied).…”

“…Consistent with the literature (Gries et al, 2009;Abdih & Tsangarides, 2010;Asongu, 2013c), let us specify a vector of variables t Y as a vector autoregressive (VAR) equation in the form: vector of independent and identically distributed error terms that are assumed to be normal with zero mean and covariance matrix  . As such, the VAR consists of a system of six equations where the right-hand side of each equation entails a common set of lagged and deterministic regressors.…”