policy amendments around the world. For example, the much debated policy implications
of China's announcement of a number of changes to its foreign exchange regime on July21, 2005 vis-a-vis reaction by US and Asian economies has sparked an increase in the
number of studies examining the topic. In light of such exam-
ples, and the policy implications of exchange rate movements, analysis of exchange rates
and their dynamics has become a cornerstone of the decision-making process in interna-tional markets. Real exchane rate (RER) may affect long run growth via sectoral allocation of resources
and also influence export performance, hence the trade balance. This is a crucial feature of RERs, that they may serve as a means of promoting
economic growth, a particularly important fact for developing economies.
Surveys of exchange rate models point out that monetary models for RER determi-
nation are unsatisfactory, in particular in the post Bretton-Woods period. Also, several authors agree that a
random walk outperforms traditional models of exchange rate determination, in terms of
forecasting. The reasons for RER deviations from its fundamental equilibrium can either
be structural changes in the fundamentals, or due to random components.
Given the empirically established relationship with economic performance in the liter-
ature, an analysis of the recent history of country's RER would lead to better knowledge
of its behaviour and subsequently guide policymakers in their decisions to promote eco-
nomic growth. Significantly, very little, if any, empirical studies on this topic have been
done for developing economies. With African countries, falling into this category, it is of
significant policy interest to investigate the behaviour of their RER and the role they can
play as a tool for policymaking in improving their economic standing. This forms the
basis and purpose of this research i.e. to analyse the evolution of the RER in a group of
African countries, so as to understand how they evolve and how they should, if possible,
be managed to boost economic growth.
Contributions to the literature on developing economies highlight how they are severely
affected by external influences. Given that they are usually oil importing economies, oil
prices fluctuations become striking factors to take into account. First, real oil prices
might be a proxy for exogenous changes of the terms of trade, and arguably the most
important exchange rate long run determinant. Second,
movements in oil prices may be linked to wealth transfers among oil-importing and oil-
exporting countries, i.e. to the balance of payments and international portfolio choices. Therefore, the effects of movements in oil prices may
be through different transmission channels. The study of this relationship has received
much more attention in the literature after the 1973-1974 oil price crisis, but less so in the case of African economies. This this paper seeks to contribute
to the empirical literature in this field and on this basis, we propose the use of the real
price of oil as the main long-run determinant of RERs for a group of developing, specifi-
cally, African countries. The paper then investigates the evidence of a (uni- or bi-lateral)
long-run relationship between the countries' RERs and real oil prices.