The Effect of Exchange Rate Regimes on Price Stability in Sub-Saharan Africa (SSA): The Role of Institutions
Christophe Toukam Kuipou *
University of Bamenda, Cameroon.
Ulrich Vianney Elisée Kaguendoµ
University of Dschang, Cameroon.
Romual Eboué
University of Douala, Cameroon.
*Author to whom correspondence should be addressed.
Abstract
The objective of this paper is to analyze the effect of exchange rate regimes on price stability through the role of institutions in order to draw lessons for SSA countries where this exchange rate policy has multiple financial, economic and social impacts. For this purpose, a panel data estimation using the Generalized Method of Moments in system was adopted and carried out on 35 countries for the period 1990-2020. Overall, the results show that, using the de facto classification of Ilzetzki, Reinhart and Rogoff (2019), under the direct effect on the one hand, membership of fixed exchange rate regimes reinforces the implementation of price stability policies, while flexible and intermediate exchange rate regimes rather disadvantage the extent of this stability. On the other hand, depending on the different combinations of exchange rate regimes with the composite index of political-economic institutions used, fixed and flexible exchange rate regimes reduce price volatility, while the intermediate exchange rate regime always disadvantages. We obtain a positive and significant effect of the composite index of institutions on inflation and also significant and expected effects of the different macroeconomic variables on inflation. For this reason, we recommend that these countries improve their framework of institutional configurations by providing favorable conditions for a monetary arrangement with capital mobility and a well-defined monetary regime, in order to maintain lower inflation in the long run, as well as political and economic stability in Sub-Saharan African countries. Then, as for the SSA countries that have opted for flexible and intermediate exchange rate regimes, we suggest that they opt for these regimes in order to further improve their room for manoeuvre offered by the natural autonomy of their monetary policy and take advantage of the competitiveness of their real equilibrium exchange rate regimes, which give better results in terms of financial equilibrium towards the path of sustained growth.
Keywords: Exchange rate regimes, price stability, composite index of institutions, SSA, GMM