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The Current Account and Real Exchange Rate Dynamics in African Countries

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  • Ahmad, A. H.
  • Pentecost, E. J.

Abstract

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.

Suggested Citation

  • Ahmad, A. H. & Pentecost, E. J., 2012. "The Current Account and Real Exchange Rate Dynamics in African Countries," Department of Economics Working Papers 32981, University of Bath, Department of Economics.
  • Handle: RePEc:eid:wpaper:32981
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    File URL: http://opus.bath.ac.uk/32981/1/current_account.pdf
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    References listed on IDEAS

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    1. Edison, Hali J. & Pauls, B. Dianne, 1993. "A re-assessment of the relationship between real exchange rates and real interest rates: 1974-1990," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 165-187, April.
    2. 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 483-496, August.
    3. 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.
    4. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    5. Ahmad, A.H. & Harvey, David I. & Pentecost, Eric J., 2011. "Exchange rate regime verification: An alternative method of testing for regime changes," Economics Letters, Elsevier, vol. 113(1), pages 96-98, October.
    6. Ben S. Bernanke & Kenneth Rogoff, 2002. "NBER Macroeconomics Annual 2001, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number bern02-1, April.
    7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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    Keywords

    real exchange rates; current accounts; structural var;

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