Impact of Exchange Rate Policy on the Trade of Industrial Products in Sub-Saharan Africa from 1975 to 2007

Abstract

The purpose of this paper is to study the potential repercussions of exchange rate policy on the trade of industrial products in Sub-Saharan African (SSA) countries. Panel data from 22 countries was used to estimate the impact of exchange rate policy on the trade of industrial products. In this respect, the effects of three indicators were analysed, namely, the effective real exchange rate (ERER) changes, real exchange rate (RER) volatility, and (model-based measures of) RER misalignment. The method of analysis consists of estimating export equations for four manufacturing sectors (chemicals, textiles, metallurgy, and wood) and two exchange rate regimes, namely, a fixed exchange rate regime represented by the 12 countries of the CFA Franc Zone (CFZ), and a second and more flexible regime, represented by 10 countries outside the CFZ. The results of the study suggest that exchange rate policy exerts a significantly positive impact on external trade performance through changes in the effective real exchange rate, and a negative impact through its misalignment. These results also reveal that it is very important to take account of the framework of economic orientations that accompany the exchange rate policies when assessing their effects on the aggregate behaviour, of the economy.