In addition to having extensive policy implications, the issues we examine also have welfare implications especially in the context of Africa where a recent World Bank study reports: “Sub-Saharan Africa now accounts for most of the world’s poor, and unlike most of the rest of the world the total number of poor there is increasing…of the world’s 28 poorest countries, 27 are in Sub-Saharan Africa.” [World Bank, 2018]. How have African countries with a pegged exchange rate regime fared against their counterparts with floating regimes is a reasonable question to ask as governments and policy makers seek answers to address Africa’s economic quagmire. (The World Bank has set a target of reducing extreme poverty to less than 3 percent of the world’s population by 2030.)
The results suggest that exchange rate policy matters for economic growth, even in the context of developing countries. Countries with pegged regimes (Communaute Financiere Africaine (CFA)-member countries) are associated with lower economic output compared to their non-CFA regime counterparts. I also find improvements in financial development to have a higher effect on economic output for CFA-member countries.
DATA AND METHODS
The panel has annual observations on all 49 countries in sub-Saharan Africa from 2000 to 2016. The primary source of data is the World Development Indicators (WDI). I estimate the relationship between economic output and exchange rate regime with a dynamic panel data model including the GDP per capita of country i at time t, the vector Z as a dummy variable representing the exchange rate regime for country i at time t (1 for countries in the CFA-franc zone and zero otherwise), and X is a battery of control variables known to impact economic output in the growth literature.