INTERNATIONAL VULNERABILITY OF SUB-SAHARAN AFRICAN COUNTRIES WITH FIXED EXCHANGE REGIMES.

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From: Journal of Developing Areas(Vol. 55, Issue 2)
Publisher: Tennessee State University
Document Type: Article
Length: 4,835 words
Lexile Measure: 1410L

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Abstract :

The fast-growing of the sub-Saharan Africa (SSA) countries over the past decade highlight that successful economic integration can assume many forms, instead of standard patterns. In this sense, this paper provides empirical evidence of the vulnerability of the West African Economic and Monetary Union (WAEMU) and Cape Verde, that adopted fixed exchange rate regimes. For this reason, we developed a global vector autoregressive GVAR model, a data shrinkage procedure, where large sets of variables are reduced to a small set of factors. It allows describing systems of higher dimensional complexities and simulating shocks in a cross-regional approach with the use of common factors. First, we specified and identified a weight matrix for the selected countries, used to reproduce this policy framework, conditioning the parameters to an interdependent trading structure. Next, a variety of tests were estimated, e.g., stationarity, structural break tests and exogeneity tests. We use the generalized impulse response functions to simulate shocks originating from European Monetary Union (EMU), China and the United States (US) on GDP, the CPI, the interest rate and the exchange rate of the SSA countries. Our results were also controlled by the productivity structures of the countries, characterized as agricultural-exporting, commodity-importing, commodity-exporting, and trading based types. In decreasing order of magnitude, shocks originating from Europe (-0.94%), China (-0.73%) and the US (-0.25%) led to a persistent decrease in the GDP and to depreciation of the exchange rate of the region. However, they were not significant for inflation. Shocks in interest rates suggest passive monetary policy. While our empirical evidence does not indicate distinct effects of shocks emanating from the economy-type structures, it points out that these structures are clearly vulnerable to external shocks. To reduce uncertainties and transaction costs from the EMU, SSA countries may consider gradually abandoning the fixed exchange rate regime with the Euro in the medium term and anticipate the development of new multilateral trade agreements. In the long term, it is highly indicated that these countries invest in export diversification and structural transformation. Keywords: Sub-Saharan Africa; International Vulnerability; Shocks; Transmission; GVAR. JEL Code: F47; E32; C33. Contact author's email address: Email: frascaroli.b@gmail.com

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Gale Document Number: GALE|A641753914