The importance of the exchange rate regime in limiting current account imbalances in sub-Saharan African countries

Abstract

One of the major current concerns of economic policy in developing countries is the choice of the appropriate exchange rate regime to consolidate and accelerate the pace of economic growth. This paper aims to investigate whether the choice of a country's exchange rate regime may affect current account imbalances for sub-Saharan African economies. To this end, we first use Bayesian model averaging (BMA) supplemented by the General-to-Specific (GETS) method to address concerns about model uncertainty and identify the key determinants (fundamentals) of external balances. Then, estimating current account imbalances over the period 1980–2012, we show that flexible exchange rate regimes are more effective in preventing such disequilibria. Consequently, candidates for membership of monetary unions should discuss widely the possible adjustment mechanisms before forming such unions; one potential measure is the sharing of external risks at the regional level.