Does the long-run monetary model hold for Sub-Saharan Africa? A time series and panel-cointegration study

Abstract

In this paper, I test the long-run monetary model of exchange rates determination for a collection of 22 Sub-Saharan African countries. My approach is in two phases. First, I perform a country-by-country analysis. Results obtained fail to lend considerable support for the model in most countries analysed. Following this failure, I resort to the second phase and employ panel techniques to test the validity of the monetary model. Interestingly, and in sharp contrast with the country-by-country analysis, I find some convincing partial support for the model, which suggests that relative money supply and relative real output play significant roles in exchange rates determination in Sub-Saharan Africa. The results yield cointegrating coefficients with correct signs and significance as predicted by the theoretical model and are generally robust to an array of estimation techniques, but the estimated elasticity of relative money supply is mostly less than unity – which explains why the support is partial.