An empirical analysis on the determinants of the real exchange rate in African countries

Abstract

The study employs annual data over 1970–90, pooled across 38 African countries, to examine the effects of a wide range of macroeconomic policies, devaluation and fundamentals on real exchange rate behaviour. Our findings suggest that the following appreciate real exchange rate: fiscal deficits; domestic credit growth; total domestic absorption-GDP ratio; public consumption-GDP ratio; private consumption-GDP ratio; terms of trade improvement arising from falling import prices (but not rising export prices); per capita income; and black market exchange rate premium. On the other hand, devaluation; investment-GDP ratio; consumer-wholesale price ratio in trading-partner countries; and economic boom or growth in industrial countries are found to depreciate real exchange rate.