Exchange Rate Policy and External Vulnerabilities in Sub-Saharan Africa: Nominal, Real or Mixed Targeting?

Fadia Al Hajj (), Gilles Dufrénot () and Benjamin Keddad ()
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Fadia Al Hajj: Aix-Marseille Univ., CNRS, EHESS, Centrale Marseille, AMSE, https://www.amse-aixmarseille.fr/en

No 1809, AMSE Working Papers from Aix-Marseille School of Economics, France

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.

Keywords: African countries; exchange rate policy; external vulnerabilities; regime-switching model (search for similar items in EconPapers)
JEL-codes: C32 F31 O24 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2018-03
New Economics Papers: this item is included in nep-afr and nep-mon
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Related works:
Journal Article: Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting? (2021)
Working Paper: Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting? (2021)
Working Paper: Exchange rate policy and external vulnerabilities in Sub-Saharan Africa: nominal, real or mixed targeting? (2021)
Working Paper: Exchange Rate Policy and External Vulnerabilities in Sub-Saharan Africa: Nominal, Real or Mixed Targeting? (2018)
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