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The Current Account and Real Exchange Rate Dynamics in African Countries

  • Ahmad, A. H.
  • Pentecost, E. J.

Persistent international current account imbalances and real exchange rate movements have become a permanent feature of the world economy. This paper, therefore, sets out to investigate the relationship between the real exchange rate and current account dynamics of eleven African countries, using data from 1980 to 2008, based on a stochastic Mundell-Fleming model in which shocks to real exchange rates and current account have been identified as permanent and temporary. Using a bi-variate structural VAR approach, the results are in consonant with the theoretical model, with permanent shocks having permanent and positive effects on both the current account and the real exchange rates. On the other hand, while temporary shocks have insignificant effects on the real exchange rates, they have very different effects on the current accounts of different countries.

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File URL: http://opus.bath.ac.uk/32981/1/current_account.pdf
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Paper provided by University of Bath, Department of Economics in its series Department of Economics Working Papers with number 32981.

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Date of creation: 2012
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Handle: RePEc:eid:wpaper:32981
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  1. Obstfeld, Maurice & Rogoff, Kenneth S., 1995. "Exchange Rate Dynamics Redux," Scholarly Articles 12491026, Harvard University Department of Economics.
  2. Jaewoo Lee & Menzie D. Chinn, 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," NBER Working Papers 6495, National Bureau of Economic Research, Inc.
  3. Hali J. Edison & B. Dianne Pauls, 1991. "Re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," International Finance Discussion Papers 408, Board of Governors of the Federal Reserve System (U.S.).
  4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  5. Ahmad, Ahmad H & Pentecost, E J, 2011. "Exchange RateRegime Verification : An Alternative Method of Testing for RegimeChanges," Department of Economics Working Papers 22748, University of Bath, Department of Economics.
  6. Leonard, Greg & Stockman, Alan C, 2002. "Current Accounts and Exchange Rates: A New Look at the Evidence," Review of International Economics, Wiley Blackwell, vol. 10(3), pages 483-96, August.
  7. Ben S. Bernanke & Kenneth Rogoff, 2002. "NBER Macroeconomics Annual 2001, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number bern02-1.
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