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: College of Business Administration - GUST - Gulf University for Science and Technology

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Abstract: This paper discusses the theoretical choice of exchange rate regimes 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 foreign 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 mixed targeting policy is a two-step strategy: First, monetary 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 competition in the domestic goods market and the degree of foreign exchange intervention. We conclude with regime-switching estimations to provide empirical evidence of how these economic fundamentals influence exchange rate policy in Sub-Saharan Africa.

Keywords: Sub-Saharan Africa; exchange rate policy; external vulnerabilities; regime-switching model (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-afr, nep-cba, nep-int and nep-mon
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Published in Applied Economics, 2021, 53 (3), pp.380-399. ⟨10.1080/00036846.2020.1808176⟩

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Related works:
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)
Working Paper: Exchange Rate Policy and External Vulnerabilities in Sub-Saharan Africa: Nominal, Real or Mixed Targeting? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:hal-02935990

DOI: 10.1080/00036846.2020.1808176

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