Toward the African Continental Free Trade Area : The Effects of Economic Integration and Democracy on Real Misalignments across Exchange Rate Regimes
This paper evaluates the role of economic integration and democracy in rationalizing differences in real exchange rate misalignments across exchange rate regimes in Africa. To this end, the paper derives competing indexes of misalignment using mode...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/451191613569046516/Toward-the-African-Continental-Free-Trade-Area-The-Effects-of-Economic-Integration-and-Democracy-on-Real-Misalignments-across-Exchange-Rate-Regimes http://hdl.handle.net/10986/35144 |
| Summary: | This paper evaluates the role of
economic integration and democracy in rationalizing
differences in real exchange rate misalignments across
exchange rate regimes in Africa. To this end, the paper
derives competing indexes of misalignment using modern
cointegration techniques while accounting for
cross-sectional dependence. The findings indicate that fixed
regimes per se are not prone to more misalignments, as
institutional quality and economic links with foreign
partners critically matter in explaining the observed
discrepancies. Furthermore, when distinguishing between
African and international partners in investment agreements,
the extent of misalignment differs according to the level of
democracy, as democratic countries can afford intermediate
regimes, while for weak democracies, fixed regimes are
required to curb disequilibria. Finally, membership in a
regional economic community significantly reduces the
magnitude of misalignments. The results imply that the
quality of institutions, more than the type of the exchange
rate regime, is called into question and should be the focus
of efforts ahead of successful implementation of the African
Continental Free Trade Area. |
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