An empirical analysis on the determinants of the real exchange rate in African countries

The study employs annual data over 1970-90, pooled across 38 African countries, to examine the effects of a wide range of macroeconomic policies, devaluation and fundamentals on real exchange rate behaviour. Our findings suggest that the following appreciate real exchange rate: fiscal deficits; domestic credit growth; total domestic absorption-GDP ratio; public consumption-GDP ratio; private consumption-GDP ratio; terms of trade improvement arising from falling import prices (but not rising export prices); per capita income; and black market exchange rate premium. On the other hand, devaluation; investment-GDP ratio; consumer-wholesale price ratio in trading-partner countries; and economic boom or growth in industrial countries are found to depreciate real exchange rate.