GEG WP 2017/126 Misalignment of exchange rates: What lessons for growth and policy mix in the WAEMU?

Author: Kako Kossivi Nubukpo

Abstract

The loss of export competitiveness recorded by the WAEMU zone in recent years has prompted studies on the quantification and implication of the degree of misalignment of the exchange rate on economic growth. Little research has, however, been interested by the impact of the degree of misalignment on economic growth and the role of the policy mix in the evolution of misalignment. In this article we use the techniques of cointegration and estimation of dynamic panel models to analyse the effect of misalignment on economic growth and the role of Policy mix in external stability. Our results suggest that the continual overvaluation of the real effective exchange rate of the zone over the period 1985-2014 resulted in a loss of economic growth of 0.32 percentage points and an increase in volatility leading to a reduction of Growth of 0.86 percentage points. Moreover, the main conclusion of the article is that the current configuration of the Policy mix does not seem to be able to control the misalignment leading to overvaluation, the latter seeming mainly to come from exogenous factors. The study advocates the promotion of instruments and / or institutional arrangements favouring greater effectiveness of the WAEMU policy mix in controlling the degree of misalignment of the CFA.

 

Keywords: Policy mix; External stability; Inflation; Growth; Misalignment; Monetary Policy; Political budget; WAEMU.

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