Zelealem Yiheyis

The Effects of Devaluation on Aggregate Output: Empirical Evidence from Africa

Abstract This paper tests the contractionary devaluation hypothesis in the context of select African countries. The output effect of devaluation is examined within an empirical model that controls, among others, for the parallel currency premium, the rate of net capital inflow, the degree of capacity utilization and political instability. The model is estimated on pooled data drawn from 20 African countries, employing alternative indicators of devaluation and pooling procedures. The results indicate that the contemporaneous output effect of nominal devaluation is negative, providing statistical support for the hypothesis that devaluation is contractionary in the short run. On the other hand, the coefficient of the lagged rate of devaluation is found to be positive, implying that the contractionary problem is temporary. The magnitude of the observed contractionary effect appears to depend on the rate of net capital inflow and the degree of capacity utilization. Devaluations accompanied by augmented net capital inflow and implemented in the presence of excess capacity are found to be less contractionary than otherwise equivalent exchange‐rate changes. The results also seem to imply that devaluations launched in the context of sizeable unofficial markets for foreign exchange are less injurious to aggregate economic activity than other exchange‐rate adjustments.

Fiscal Adjustment to Currency Devaluation in Selected African Countries: An Empirical Analysis

The object of this paper is to examine the fiscal consequences of exchange rate adjustment in the context of selected African economies. The paper identifies the salient channels through which the exchange rate is expected to influence fiscal variables, describes the behaviour of these indicators in the sample countries, and formulates and estimates an empirical model that links the real exchange rate with real fiscal revenue and expenditure. It finds that currency devaluation — where launched — has, on balance, resulted in real depreciation and that the latter has increased real fiscal revenue, with imperceptible effect on real expenditures. The fiscal deficit is found to exert no statistically significant influence on the behaviour of the real exchange rate. n n n nCe document examine les consequences budgetaires de l’ajustement du taux de change dans un certain nombre de pays africains. Il determine les principales voies par lesquelles le taux de change est cense influer sur les variables budgetaires, decrit le comportement de ces indicateurs dans les pays concernes, elabore et evalue un modele empirique etablissant un lien entre le taux de change reel et les recettes et depenses budgetaires reelles. Il constate que la devaluation, la ou elle est intervenue, s’est en definitive traduite par une veritable depreciation, qui a entraâne un accroissement des recettes budgetaires reelles et exerce un effet imperceptible sur les depenses reelles. En outre, sur le plan statistique, le deficit budgetaire n’exerce pas d’effet significatif sur le comportement.

Remittances and Economic Development in Africa: A Review of Empirical Evidence

This chapter presents a review of the literature on remittances and economic development with a focus on Africa. The chapter describes the importance of remittances relative to ODA and FDI in the continent, outlines the channels through which remittances are expected to influence economic development, and then reviews the related empirical evidence largely in the context of Africa. The review reveals that the evidence is thin and mixed, depending on the dimension of economic development examined. Overall, the evidence seems to suggest that remittances help alleviate poverty and improve living conditions but may worsen income inequality, with mixed effects reported with respect to economic growth and some of its determinants.