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: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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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: exchange rate policy; African countries; regime-switching model; external vulnerabilities (search for similar items in EconPapers)
Date: 2018-03
New Economics Papers: this item is included in nep-afr and nep-mon
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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? (2021)
Working Paper: Exchange Rate Policy and External Vulnerabilities in Sub-Saharan Africa: Nominal, Real or Mixed Targeting? (2018)
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