n AfricaGrowth Agenda - Foreign exchange rates, trade and investments in Africa

Volume 2014, Issue 1
  • ISSN : 1811-5187


This article surveys the volatility of exchange rates and its impact on trade and investments in Africa. The survey shows that Africa's exchange rates are more volatile than exchange rates in other regions. It also shows that both trade and investments respond to currency fluctuations with a time lag. That is, real depreciations of African currencies improve trade balances in sub-Saharan African countries but worsen it in the Northern African region. The survey also shows that real depreciations elicit net foreign direct investment inflows but cause a reduction in net portfolio inflows in Africa. Finally, in an attempt to appreciate the unidirectional causality from real exchange rates and capital flows, the survey shows that foreign exchange risk is conditionally priced in Africa's capital markets. The survey concludes by proffering some policy guidelines.

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