Economic policy uncertainty and the ECOWAS exchange rate mechanism

Abstract

This study examines the nexus between economic policy uncertainty and real exchange rates of ECOWAS countries to observe the countries’ responses to external shocks and explore the potential success of exchange rate mechanism (ERM) in the West African region. We explore several robustness in the analysis which include consideration of symmetric and asymmetric Autoregressive Distributed Lag model specifications, four alternative real exchange rates measures (US dollar-denominated, Euro-denominated, SDR-denominated, and real effective exchange rates), and three alternative economic policy uncertainty measures (global EPU, US-EPU, and EU-EPU). In line with theory, the findings suggest that the Meese–Rogoff puzzle is alive in West Africa given the widespread statistical insignificance of the estimates. Other dimension of the findings suggest that the countries respond asymmetrically to external shocks. The study highlights the importance of commitment to flexibility criteria in the region in place of devotion to macroeconomic convergence.