The importance of the exchange rate regime in limiting current account imbalances in sub-Saharan African countries

Abstract

One of the major current concerns of economic policy in developing countries is the choice of the appropriate exchange rate regime to consolidate and accelerate the pace of economic growth. This paper aims to investigate whether the choice of a country's exchange rate regime may affect current account imbalances for sub-Saharan African economies. To this end, we first use Bayesian model averaging (BMA) to address concerns about model uncertainty and identify the key determinants (fundamentals) of external balances. Then, estimating current account imbalances over the 1980-2012 period, we show that flexible exchange rate regimes are more effective in preventing such disequilibria. Consequently, candidates for membership of monetary unions should discuss widely the possible adjustment mechanisms before forming such unions; one potential measure being the sharing of external risks at regional level.

Exchange rate misalignments and the external balance under a pegged currency system

“…The data collected initially for all of these variables are annual, spanning the period from 1980 to 2012 for a panel of 12 CFA zone countries . Then we construct non‐overlapping 4‐year averaged data allowing to smooth business‐cycle fluctuations and therefore really focus on the underlying determinants of real effective exchange rate as is done in the context of current account models (see, among others, Chinn & Prasad, ; Lane & Milesi‐Ferretti, ; Gnimassoun, ) or cross‐country growth literature (see, e.g., Ding & Knight, ). This is particularly relevant for developing countries such as those of the CFA zone for which measurement errors are also at stake, in addition to significant short‐term fluctuations they face owing to the volatility of commodity prices (Barro, ).…”

The effect of remittances on the current account in developing and emerging economies

“…These outcomes are observed because of the resource reallocation and movement in the price of nontradable goods that are generated by remittances, which tend to occur beyond the immediate aftermath of remittance inflow. Gnimassoun () also shows that a flexible exchange rate regime performs better in terms of preventing absolute external imbalances, lending support to a policy stance that promotes exchange rate flexibility.…”

Oil price, trade openness, current account balances and the official exchange rate in Nigeria

“…Similarly, Gnimassoun and Coulibaly () discovered that flexible real exchange rate and current account sustainability are positively correlated, which implies that exchange rate basically influences the level of current account sustainability in sub‐Saharan African countries. So also, Gnimassoun () identified a robust relationship between current account external imbalances and exchange rate regimes in sub‐Saharan African countries, while Gervais et al . () noticed a negative nexus between real exchange rate and current account in the long run.…”