The asymmetric effects of exchange rate on trade balance and output growth

Abstract

The study analyses the impact of exchange rate asymmetries on trade and output growth in 8 of the largest African countries between 1970 and 2019 using the non-linear autoregressive distributed lag (NARDL) framework. The empirical result confirms a long-run relationship between exchange rate, trade and output growth. Also, currency appreciation and depreciation enhance short-run trade and output in South Africa while reducing both in Angola. Regarding Egypt and Morocco, currency appreciation improves short-run trade and growth, but in the long run, depreciation lowers both. This is similar in Kenya and Nigeria, except for the weak negative effect of currency depreciation on trade. In general, for most African nations, both appreciation and depreciation primarily exert negative impacts on the long-run trade balance, while depreciation has mainly short-run positive effects. Similarly, depreciation positively impacts short-run growth, while currency appreciation remains largely negative. We then recommend policy prescriptions for the continent.