Economic Fundamentals and Real Exchange Rate in African Oil Producing Countries: Evidence from Asymmetric Cointegration

Abstract

The role of exchange rates is very important in the international market and the variability of exchange rates both in the case of appreciation or depreciation is directly connected with the economic performance of a country. Exchange rate variations in oil-producing countries in Africa have been too high resulting in volatilities due to domestic and foreign shocks. High volatility of exchange rate may translate into reduction of trade flows, foreign direct investment, and instability in both interest rates and inflation rates. Several studies on the relationship between economic fundamentals and exchange rates focused more on Africa or country-specific with limited focus on African oil-producing countries using asymmetric cointegration. Therefore, this study examines the relationship between some economic fundamentals and real exchange rates in oil-producing countries in Africa. The dynamics panel non-linear autoregressive distributed lag and linear autoregressive distributed lag were used to investigate the relationship between economic fundamentals and real exchange rate (RER). The NARDL result shows evidence that there exists both short and long-run asymmetric relationship between economic fundamentals and RER. The study recommended that policymakers in these countries pay more attention to their macroeconomic policies to reduce the production and transaction costs of foreign direct investment (FDI).