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Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries

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  • Kadjatou Dakoure

    (Norbert ZONGO University)

  • Mahamadou Diarra

    (Norbert ZONGO University)

  • M. Idrissa Ouedraogo

    (Aube Nouvelle University)

Abstract

The objective of this study is to analyze the role of exchange rate regime on real exchange rate misalignment in sub-Saharan African (SSA) countries. At first, to determine equilibrium exchange rates, we use the BEER (Behavioral Equilibrium Exchange Rate) approach and the estimation techniques following the Cross-Sectional Augmented-Autoregressive Distributed Lags (CS-ARDL) approach that accounts for time dynamics, cross-sectional heterogeneity, and cross-sectional dependence. Then, the degree of exchange rate misalignment is evaluated. Finally, the system Generalized Method of Moments (GMM) estimation method is used to determine the role of exchange rate regime on exchange rate misalignment. The results show that countries have an average overvaluation of 9.52%. Furthermore, real exchange rate misalignment is larger and more persistent in countries with fixed exchange rate regimes than in countries with floating exchange rate regimes. A more flexibility currency is associated with less real exchange rate misalignment. As a policy implication, SSA countries need to prioritize floating (flexible or intermediate) over fixed regimes to contain the level of real exchange rate misalignment and to correct the real exchange rate misalignment persistence.

Suggested Citation

  • Kadjatou Dakoure & Mahamadou Diarra & M. Idrissa Ouedraogo, 2023. "Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries," International Economics and Economic Policy, Springer, vol. 20(3), pages 425-455, July.
    • Handle: RePEc:kap:iecepo:v:20:y:2023:i:3:d:10.1007_s10368-023-00568-7
    DOI: 10.1007/s10368-023-00568-7
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    More about this item

    Keywords

    Real exchange rate misalignment; Exchange rate regime; CS-ARDL; SSA countries;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy

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