IDEAS home Printed from https://ideas.repec.org/a/bla/afrdev/v31y2019i3p335-347.html
   My bibliography  Save this article

Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa

Author

Listed:
  • Oyakhilome Ibhagui

Abstract

Do government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.

Suggested Citation

  • Oyakhilome Ibhagui, 2019. "Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa," African Development Review, African Development Bank, vol. 31(3), pages 335-347, September.
    • Handle: RePEc:bla:afrdev:v:31:y:2019:i:3:p:335-347
    DOI: 10.1111/1467-8268.12393
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1467-8268.12393
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1467-8268.12393?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Shenggen Fan & Xiaobo Zhang, 2008. "Public Expenditure, Growth and Poverty Reduction in Rural Uganda," African Development Review, African Development Bank, vol. 20(3), pages 466-496.
    2. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, April.
    3. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, November.
    4. Bun, Maurice J. G. & Kiviet, Jan F., 2003. "On the diminishing returns of higher-order terms in asymptotic expansions of bias," Economics Letters, Elsevier, vol. 79(2), pages 145-152, May.
    5. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, September.
    6. Zsolt Darvas, 2012. "Real Effective Exchange Rates for 178 Countries: a New Database," Working Papers 1201, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
    7. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970-2004," Journal of International Economics, Elsevier, vol. 73(2), pages 223-250, November.
    8. Kim, Soyoung & Roubini, Nouriel, 2008. "Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S," Journal of International Economics, Elsevier, vol. 74(2), pages 362-383, March.
    9. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long‐run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
    10. Luca Antonio Ricci & Gian Maria Milesi-Ferretti & Jaewoo Lee, 2013. "Real Exchange Rates and Fundamentals: A Cross-Country Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 845-865, August.
    11. Kenneth A. Froot & Kenneth Rogoff, 1991. "The EMS, the EMU, and the Transition to a Common Currency," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 269-328, National Bureau of Economic Research, Inc.
    12. repec:bla:afrdev:v:29:y:2017:i:s1:p:1-14 is not listed on IDEAS
    13. Rodrigo Caputo & Miguel Fuentes, 2012. "Government Spending and the Real Exchange Rate: a Cross - Country Perspective," Working Papers Central Bank of Chile 655, Central Bank of Chile.
    14. Badi H. Baltagi & Chihwa Kao, 2000. "Nonstationary Panels, Cointegration in Panels and Dynamic Panels: A Survey," Center for Policy Research Working Papers 16, Center for Policy Research, Maxwell School, Syracuse University.
    15. repec:mcb:jmoncb:v:45:y:2013:i::p:845-865 is not listed on IDEAS
    16. Paul Terhemba Iorember & Gylych Jelilov, 2018. "Computable General Equilibrium Analysis of Increase in Government Agricultural Expenditure on Household Welfare in Nigeria," African Development Review, African Development Bank, vol. 30(4), pages 362-371, December.
    17. Bouakez, Hafedh & Chihi, Foued & Normandin, Michel, 2014. "Fiscal policy and external adjustment: New evidence," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 1-20.
    18. Emmanuel Joseph Mensah & Marilyne Huchet-Bourdon & Laure Latruffe, 2014. "Infrastructure Access and Household Welfare in Rural Ghana," African Development Review, African Development Bank, vol. 26(3), pages 508-519, September.
    19. Ravn, Morten O. & Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "Consumption, government spending, and the real exchange rate," Journal of Monetary Economics, Elsevier, vol. 59(3), pages 215-234.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ibhagui, Oyakhilome, 2017. "Linking Fiscal Policy and External Competitiveness in Sub-Saharan Africa – Does Government Spending Drive The Real Exchange Rate in Sub-Saharan Africa," MPRA Paper 77291, University Library of Munich, Germany, revised 03 Mar 2017.
    2. Oscar Bajo-Rubio & Burcu Berke & Vicente Esteve, 2020. "Fiscal policy and the real exchange rate: some evidence from Spain," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(2), pages 267-280, May.
    3. Moritz Cruz & Armando Sánchez‐Vargas, 2022. "Government spending and the exchange rate: Exploring this relationship in Mexico using a cointegrated system of equations," Review of Development Economics, Wiley Blackwell, vol. 26(1), pages 587-605, February.
    4. Galstyan, Vahagn & Lane, Philip R., 2009. "Fiscal Policy and International Competitiveness: Evidence from Ireland," The Economic and Social Review, Economic and Social Studies, vol. 40(3), pages 299-315.
    5. Mariarosaria Comunale, 2019. "Long‐run determinants and misalignments of the real effective exchange rate in the EU," Scottish Journal of Political Economy, Scottish Economic Society, vol. 66(5), pages 649-672, November.
    6. Vahagn Galstyan & Adnan Velic, 2017. "Taxation, Debt and Relative Prices in the Long Run: The Irish Experience," The Economic and Social Review, Economic and Social Studies, vol. 48(3), pages 231-251.
    7. Vahagn Galstyan & Adnan Velic, 2018. "Public debt and relative prices in a cross-section of countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(2), pages 229-245, May.
    8. Biswajit Maitra & Dhritiman Ganguli, 2024. "Fiscal policy and real exchange rate variations in India," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 14(3), pages 619-640, September.
    9. Dumrongrittikul, Taya & Anderson, Heather M., 2016. "How do shocks to domestic factors affect real exchange rates of Asian developing countries?," Journal of Development Economics, Elsevier, vol. 119(C), pages 67-85.
    10. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," EconomiX Working Papers 2018-51, University of Paris Nanterre, EconomiX.
    11. Andrea Salazar-Díaz & Aarón Levi Garavito-Acosta & Sergio Restrepo Ángel & Leidy Viviana Arcila-Agudelo, 2023. "Real Equilibrium Exchange Rate in Colombia: Thousands of VEC Models Approach," Lecturas de Economía, Universidad de Antioquia, Departamento de Economía, issue 99, pages 33-78, July-Dece.
    12. Christopoulos, Dimitris K. & Gente, Karine & León-Ledesma, Miguel A., 2012. "Net foreign assets, productivity and real exchange rates in constrained economies," European Economic Review, Elsevier, vol. 56(3), pages 295-316.
    13. Luca Antonio Ricci & Gian Maria Milesi-Ferretti & Jaewoo Lee, 2013. "Real Exchange Rates and Fundamentals: A Cross-Country Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 845-865, August.
    14. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, September.
    15. Florian Morvillier, 2018. "On the impact of the launch of the euro on EMU macroeconomic vulnerability," Working Papers hal-04141675, HAL.
    16. Hoffmann, Mathias & Tillmann, Peter, 2012. "International financial integration and national price levels: The role of the exchange rate regime," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1503-1528.
    17. Konrad Adler & Dr. Christian Grisse, 2014. "Real exchange rates and fundamentals: robustness across alternative model specifications," Working Papers 2014-07, Swiss National Bank.
    18. Francisco Castro & Daniel Garrote, 2015. "The effects of fiscal shocks on the exchange rate in the EMU and differences with the USA," Empirical Economics, Springer, vol. 49(4), pages 1341-1365, December.
    19. Trunin, Pavel (Трунин, Павел) & Bozhechkova, Alexandra (Божечкова, Александра), 2015. "Analysis of Factors Affecting the Dynamics of the Real Ruble Exchange Rate [Анализ Факторов Динамики Реального Валютного Курса Рубля]," Published Papers mak13, Russian Presidential Academy of National Economy and Public Administration.
    20. Galstyan, Vahagn & Velic, Adnan, 2017. "Debt thresholds and real exchange rates: An emerging markets perspective," Journal of International Money and Finance, Elsevier, vol. 70(C), pages 452-470.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:afrdev:v:31:y:2019:i:3:p:335-347. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afdbgci.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.