The Sources of Real Exchange Rate Fluctuations in Sub-Saharan Africa

Abstract

This paper looks into the sources of real exchange rate fluctuations in Sub-Saharan African (SSA) countries. This issue is investigated in a context of small open economies of SSA using a structural Vector Auto Regression (VAR) approach with limited capital mobility and a weak-banking system in Africa. A structural VAR implies long run restrictions of a small open economy model to identify the shocks. The results suggest that the real exchange rate (RER) variability is mostly driven by real disturbances in both the ”Communaute Financiere Africaine” (CFA) and non-CFA countries at long term forecasting horizons. The findings show evidence that nominal shocks seem to matter more in the non-CFA countries in the short run in explaining RER and price level fluctuations as a result of the diverse fiscal and monetary policies in the non-CFA countries in contrast to the CFA countries.