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Periodical article Periodical article Leiden University catalogue Leiden University catalogue WorldCat catalogue WorldCat
Title:Can African countries achieve long-run real exchange rate depreciation though nominal exchange rate depreciation?
Author:Holmes, Mark J.
Periodical:South African Journal of Economics
Geographic term:South Africa
External link:https://onlinelibrary.wiley.com/doi/10.1111/j.1813-6982.2004.tb00114.x/pdf
Abstract:The extent to which a devaluation of the nominal exchange rate leads to a long-run devaluation of the real exchange rate is of major importance to policymakers in less developed countries. Using a sample of 26 African countries, the author tests for a long-run relationship between the nominal and real exchange rate with respect to the US dollar. A key contribution from the study is the application of panel data unit root and cointegration techniques. Using quarterly data for 1973-2002, the null of non cointegration between the real and nominal exchange rate is strongly rejected and estimation of the long-run relationship by fully modified ordinary least squares (OLS) and dynamic OLS indicates a positive group-mean long-run elasticity of a little less than one third. This suggests that African countries can indeed achieve long-run real exchange rate devaluation through a nominal devaluation, although the findings reveal a range of divergent experiences across African countries. This long-run result is at variance with much of the existing literature, that points towards a diminishing relationship between nominal and real exchange rates lasting into the short to medium run only. Bibliogr., notes, ref. [ASC Leiden abstract]