Exchange Rate Volatility and Economic Activities of Africa's Sub-Groups

Abstract

Exchange rates have been highly volatile in Africa, especially since the move to a floating exchange rate system beginning in the 1980s. Generally, the pattern of exchange rate changes differs between Africa's two main sub-groups (CFA and non-CFA groups) due to the different monetary/exchange rate systems they adopted. This article therefore examines the effect of exchange rate volatility on the economic activities in Africa and its sub-groups during the period 1986–2011 using a panel data approach. Rational expectation theory informs the division of exchange rate into anticipated and unanticipated. Both the demand and supply channels are explored to trace the impact of the exchange rate volatility on price as well as aggregate demand and its components. Empirical results reveal differences in the impact of exchange rate volatility on economic activities between Africa's two sub-groups. Exchange rate volatility produced more significant effects in the non-CFA group than in the CFA group.