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Monetary Models Evaluation of Exchange Rate Determination in the Non-WAEMU Anglophone West Africa and Guinea

Mogaji, Peter Kehinde (2018): Monetary Models Evaluation of Exchange Rate Determination in the Non-WAEMU Anglophone West Africa and Guinea.


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This paper assessed exchange rate determination and the associated macroeconomic fundamentals across the non-West African Economic and Monetary Union (WAEMU) Anglophone countries (The Gambia, Ghana, Liberia, Nigeria and Sierra Leone) and Guinea. These six countries were known the West African Monetary Zone (WAMZ). Further steps were taken to check for similarities in the determination of exchange rates by the fundamentals as well as the uniformity of macroeconomic determinants of exchange rates and their associated explanatory powers towards justifying the appropriateness (or otherwise) of a single fixed exchange rate regime across these WAMZ countries in the event of monetary integration of West Africa which would be characterised by common currency and common central bank. This study applied two variants of the monetary models of exchange rate determination: (i) the flexible-price monetary model (FPMM) and (ii) the real interest differential monetary model (RIDMM). These monetary theories and models of exchange rates determination are very useful tools in explaining the behaviour of exchange rates in any given economy. Annual, quarterly and monthly data, averagely spanning between 1980 and 2015 were employed. Cross-rate conversions were estimated by the author in order to generate bilateral exchange rates among the WAMZ countries. The monetary models constructed incorporated the extent of informal economies within these WAMZ countries. The two monetary models were estimated with the Canonical Cointegrating Regression (CCR), Dynamic Ordinary Least Square (DOLS) regression and Markov Switching Dynamic (MSD) regression approaches for country estimations while Random Effect (Generalised Least Square) estimation of panel data of the six WAMZ countries was applied in the evaluation of homogeneity of exchange rate behaviours. Furthermore, the relationships in the FPMM and RIDMM were examined with three residual-based cointegration tests on the residuals of the estimates of Fully Modified Ordinary Least Square (FMOLS) cointegrating regressions (Phillips-Oualiaris, Engle-Granger and Park’s Added Variable). The US dollar based exchange rates estimated yielded evidence towards the conclusion that The Gambian dalasi, the Nigerian naira and the Sierra Leonean leone are the three WAMZ currencies well-suited for a single exchange rate regime. Estimations of the Nigerian naira-based exchange rates revealed that Sierra Leonean leone, the Guinea franc and the Ghanaian cedi are also suitable for the single foreign exchange market. What is significant here is that Nigeria (the lead economy in West Africa) is evidently suited for the single exchange rate regime. Evidently, Liberia was not reported as being suitable in any of the estimations.

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