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The Current Account and Real Exchange Rate Dynamics in African Countries

Author

Listed:
  • A H Ahmad

    (University of Bath)

  • Eric J Pentecost

    (Loughborough University
    University of Antwerp)

Abstract

Persistent international current account imbalances and real exchange rate movements have become a permanent feature of the world economy. This paper, therefore, sets out to investigate the relationship between the real exchange rate and current account dynamics of eleven African countries, using data from 1980 to 2008, based on a stochastic Mundell-Fleming model in which shocks to real exchange rates and current account have been identified as permanent and temporary. Using a bi-variate structural VAR approach, the results are in consonant with the theoretical model, with permanent shocks having permanent and positive effects on both the current account and the real exchange rates. On the other hand, while temporary shocks have insignificant effects on the real exchange rates, they have very different effects on the current accounts of different countries.

Suggested Citation

  • A H Ahmad & Eric J Pentecost, 2012. "The Current Account and Real Exchange Rate Dynamics in African Countries," Department of Economics Working Papers 4/12, University of Bath, Department of Economics.
    • Handle: RePEc:eid:wpaper:32981
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    File URL: https://purehost.bath.ac.uk/ws/files/9438926/current_account.pdf
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    References listed on IDEAS

    as
    1. Lee, Jaewoo & Chinn, Menzie D., 2006. "Current account and real exchange rate dynamics in the G7 countries," Journal of International Money and Finance, Elsevier, vol. 25(2), pages 257-274, March.
    2. Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
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    5. Jaewoo Lee & Menzie D. Chinn, 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," NBER Working Papers 6495, National Bureau of Economic Research, Inc.
    6. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 624-660, June.
    7. Ahmad, A.H. & Harvey, David I. & Pentecost, Eric J., 2011. "Exchange rate regime verification: An alternative method of testing for regime changes," Economics Letters, Elsevier, vol. 113(1), pages 96-98, October.
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    Cited by:

    1. Ibrahim K. Sule and Mohammed Shuaibu, 2020. "Current Account Behavior, Real Exchange Rate Adjustment and Relative Output in Nigeria," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 45(3), pages 77-99, September.

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    Keywords

    real exchange rates; current accounts; structural var;
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