The challenging journey to floating: How did both the steering of the transition and COVID19 transform the domestic Forex Market in Africa?

Abstract

This article investigates the impacts of transition process steering and the COVID19 pandemic on domestic forex market behavior. To do so, we conducted a comparative analysis based on various GARCH family models and the case of four African countries which adopted different transition paths from fixed to intermediary and/or floating regimes. Our main empirical result is that smooth and gradual transition allows for a better adaptation of the domestic market actors, resulting in improved liquidity management and shocks absorption than countries with forced regime switch. We also notice a significant fallout from the COVID19 pandemic on economies where the regime transition was abrupt as the domestic forex market became more sensitive to endogenous factors. Finally, we presented critical policy implications and some suggestions for future studies.