Global imbalances, external adjustment and propagated shocks: An African perspective from a global VAR model

This paper examines the impacts of external adjustment related to global imbalances on the external accounts (trade balance, current account and net foreign asset position) and real output in oil-exporting and frontier markets in Africa via the trade and financial (valuation) channels. To this end, we estimate two global vector autoregression (GVAR) models for 47 countries across different regions, over the period 1979Q2–2016Q4. We also consider the relative importance of global oil price shock and financial market volatility (proxied by the VIX index) as potential drivers of global imbalances. Our results show that the exchange rate policies in the US and China are equally important for economic activity and external accounts of African countries, with changes in China’s real effective exchange rate (REER) exerting greater influence on the external accounts of these developing countries. The effects of a positive oil shock and heightened financial market volatility are transmitted into African countries via both the trade and the financial channels, but the differentiated impacts of the oil price shock deepen the external imbalances between oil-exporters and frontier markets in Africa. The trade channel emerged as the main transmission mechanism for these external shocks, while the role of valuation effect working through changes in REER is limited, and negligible with respect to the oil price shock.