Exchange rate determination in selected African economies

Abstract

Exchange rates remain among the most important prices in Africa and the global economy. This is due to the influences the exchange rate has on the flow of goods, services and capital in a country. Moreover, it affects other macroeconomic variables. Hence, the selection and administration of an appropriate exchange rate regime is a vital component of economic management particularly for African countries most of which are small open economies. This study therefore, aimed to examine the issues of exchange rates in African economies. The study explored five aspects of real exchange rates: Real Exchange Rates and Macroeconomic Fundamentals, the Balassa-Samuelson effect, Real Exchange Rate Overshooting, Real Exchange Rates and Commodity Prices and Real Exchange Rate Misalignment, all in the context of African countries. The study was conducted in a selection of African countries using a panel data approach. The selection of countries studied was based on the availability of data and periods covered range from1980 to 2016. Different econometric models and analytical tools such as the Dynamic Ordinary Least Squares (DOLS) and the Random Effects Model were applied. The results of the study revealed significant relationships between the real exchange rate and some macroeconomic fundamentals. Furthermore, negative and positive coefficients for real exchange rate misalignment for the different models and samples were found, showing periods of undervaluation and overvaluation of the real exchange rate.