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Toward the African Continental Free Trade Area : The Effects of Economic Integration and Democracy on Real Misalignments across Exchange Rate Regimes (English)

This paper evaluates the role of economic integration and democracy in rationalizing differences in real exchange rate misalignments across exchange rate regimes in Africa. To this end, the paper derives competing indexes of misalignment using modern cointegration techniques while accounting for cross-sectional dependence. The findings indicate that fixed regimes per se are not prone to more misalignments, as institutional quality and economic links with foreign partners critically matter in explaining the observed discrepancies. Furthermore, when distinguishing between African and international partners in investment agreements, the extent of misalignment differs according to the level of democracy, as democratic countries can afford intermediate regimes, while for weak democracies, fixed regimes are required to curb disequilibria. Finally, membership in a regional economic community significantly reduces the magnitude of misalignments. The results imply that the quality of institutions, more than the type of the exchange rate regime, is called into question and should be the focus of efforts ahead of successful implementation of the African Continental Free Trade Area.

Details

  • Author

    Owoundi Fouda,Ferdinand, Avom,Desire, Kuete,Flora Yselle

  • Document Date

    2021/02/17

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS9548

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    Africa,

  • Region

    Africa,

  • Disclosure Date

    2021/02/17

  • Disclosure Status

    Disclosed

  • Doc Name

    Toward the African Continental Free Trade Area : The Effects of Economic Integration and Democracy on Real Misalignments across Exchange Rate Regimes

  • Keywords

    Common Market for Eastern and Southern Africa; trade and investment; west african economic and monetary union; exchange rate regime; economic integration; bilateral investment agreement; fixed regime; real exchange rate misalignment; fixed exchange rate regime; country exchange rate; democratic country; real effective exchange rate; terms of trade; crawling band; long-run relationship; Intergovernmental Authority on Development; regional trade agreement; import-competing industry; oil and gas export; long-run equilibrium; real exchange rate appreciation; equilibrium exchange rate; net foreign asset; crawling peg; exchange rate arrangement; industrial production; producer price index; department of economics; bilateral investment treaty; principal trading partners; panel data model; currency board arrangement; flexible regime; commodity price shock; total factor productivity; exchange rate variation; exchange rate overvaluation; exchange rate uncertainty; exchange rate volatility; capital flow resulting; nominal exchange rate; current account imbalance; form of governance; balance of payment; natural resource endowment; lack of transparency; domestic currencies; exchange rate variability; exchange rate instability; exchange rate management; exchange rate stability; intermediate regime; foreign exchange shortage; standard error; currency union; tradable good; real appreciation; foreign partner; long-term relationship; monetary policy; dual market; international partners; output gap; government expenditure; Exchange Rates; capital inflow; Capital Inflows

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Citation

Owoundi Fouda,Ferdinand Avom,Desire Kuete,Flora Yselle

Toward the African Continental Free Trade Area : The Effects of Economic Integration and Democracy on Real Misalignments across Exchange Rate Regimes (English). Policy Research working paper,no. WPS 9548 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/451191613569046516/Toward-the-African-Continental-Free-Trade-Area-The-Effects-of-Economic-Integration-and-Democracy-on-Real-Misalignments-across-Exchange-Rate-Regimes