Exchange rate regimes and inflation and output in Sub-Saharan countries

BIS Working Papers  |  No 53  | 
01 March 1998
by  Marc Klau
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 |  31 pages
The paper studies the role of real exchange rates and exchange rate policies in explaining differences in the economic performance in the CFA franc countries, with their fixed exchange rate regime, and another group of countries in Sub-Saharan Africa with more flexible arrangements. Policy-makers in inflation-prone countries are faced with a permanent dilemma: should policy priority be given to containing inflation or to maintaining competitiveness through currency depreciation. This policy conflict tends to be aggravated by the fact that in both country groups devaluations seem to have a positive impact on economic activity, throwing doubt on previous work on possible contractionary effects of devaluations. Even so, the question as to whether the pegging of an exchange rate is advantageous, when taking account of both output and inflation effects, remains open, as it partly depends on the supply shocks to which the countries are exposed.