The Effects of Domestic Policies and External Factors on the Real Exchange Rate and Economic Performance in Sub-Saharan Africa

Abstract

This paper examines the relative contributions of domestic and external factors to real exchange rate changes in six sub-Sahara African countries during the period 1960–91. A vector autoregression (VAR) model is used to analyze the interrelationships between the current account, the budget balance and the real exchange rate. The results suggest that external factors such as the terms of trade and foreign income were as important as domestic policy mistakes in causing real exchange rate misalignment in sub-Saharan Africa.