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Exchange market pressure in African "Lusophone" countries

Show simple item record 2011-03-23T10:49:26Z 2016-07-25T05:48:56Z 2011-03-23T10:49:26Z 2016-07-25T05:48:56Z 2011-03-23T10:49:26Z 2007-11
dc.description.abstract This paper explores the credibility of exchange rate arrangements for the five African Portuguese-speaking (PALOP) countries. Our working hypothesis is that credibility necessarily implies low mean exchange market pressure (EMP), low EMP conditional volatility and low-severity EMP crises. In addition, economic fundamentals must account for EMP dynamics. We also seek evidence of a risk-return relationship for mean EMP and of "bad news" (negative shocks) having a greater impact on EMP volatility than "good news" (positive shocks). Using our econometric models, we are able to rank PALOP countries' conditional volatility in ordinal terms. Our main onclusion is that countries with currency pegs, such as Guinea-Bissau (GB) and Cape Verde (CV), clearly have lower volatility when compared to those with managed floats and are therefore more credible. Moreover, EMP crises episodes under pegs are much less severe. We find that economic fundamentals correctly account for mean EMP in all countries and that the risk-return relationship is much more favorable for investors under currency pegs, as the increase in volatility is lower for the same rate of return. The exception to this finding is Mozambique {MOZ), which apparently has a risk-return profile akin to that enjoyed by countries with pegs. A plausible reason is that MOZ has the only managed float in our sample implementing monetary and exchange rate policy within the confines of an IMF framework, which establishes floors for international reserves and ceilings for the central bank's net domestic assets.
dc.title Exchange market pressure in African "Lusophone" countries
dc.type Conference document

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