The nonlinearity of exchange rate pass‐through on currency invoice: A quantile, generalized method of moments and threshold effect‐test from sub‐Sahara African economies

Idris Abdullahi Abdulqadir

International Journal of Finance & Economics, 2022, vol. 27, issue 1, 1473-1494

Abstract: This article explores the existence of the asymmetric effect of exchange rate pass‐through on exporter's currency‐invoice in 44 resources abundant sub‐Saharan African countries over the period 2008–2017. The investigation is carried‐out using asymmetric threshold regression developed by Hansen (1999, 2000) through 1,000 bootstrapping replications and the grid search. Our empirical results based on 44 SSA countries reveal a significant single threshold of 2.60%. We consider the effects of real income, openness, and the terms of trade on the real exchange rate measures, which exhibited a significant effect on the exporter's currency‐invoicing when exceeds beyond the threshold's values. Furthermore, we also consider the distribution of the effect of the regressors on currency‐invoice and found significant quantile coefficients appeared differently from the OLS coefficients. The quantile estimates for the exchange rate pass‐through reveal an asymmetry and gradual decay on the real exchange rate coefficients from 10th quantile. Hence, the pass‐through on the exporter's currency‐invoice is incomplete. Besides, the dynamic panel two‐step difference GMM estimators revealed statistically significant short‐run and long‐run impacts of ERPT on exporter's currency‐invoice in 44 SSA countries. In policy terms, the central banks in SSA countries should monitor the developments in the foreign exchange market to design appropriate policies to resist external sector shock from international trade.

Date: 2022
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