Skip to main content
SpringerLink
Log in

Asymmetric response of domestic production to exchange rate changes: evidence from Africa

  • Published:
Economic Change and Restructuring Aims and scope Submit manuscript

Abstract

In this paper we consider the asymmetric effects of real effective exchange rate changes on domestic production of 13 African nations, the first comprehensive study on the topic in Africa. We find that exchange rate changes have short-run and long-run asymmetric effects on output in most countries in Africa. However, the results are country specific. In some countries a depreciation is expansionary but appreciation has no effect on output. In some countries, an appreciation hurts domestic output but a depreciation has no effects. Such findings are possible only if we separate appreciations from depreciations and adhere to nonlinear modeling.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Note that Bahmani-Oskooee and Mohammadian (2016) also included the wage rate in their model as another factor affecting aggregate supply. However, due to lack of wage data for any of the African nations in our sample, we had to exclude wages. Indeed, most previous studies have only included the first three exogenous variables in their models. Given this limitation when wage data becomes available, future research must consider including the wage rate in the model and see how the results are affected.

  2. The two partial sum variables are constructed as \(POS_{t} = \sum\nolimits_{j = 1}^{t} {\hbox{max} \left( {\Delta \ln REX_{j} ,0} \right)}\) and \(NEG_{t} = \sum\nolimits_{j = 1}^{t} {\hbox{min} \left( {\Delta \ln REX_{j} ,0} \right)}\). Intuitively, partial sum of positive (negative) changes at time t, is the cumulative sum of all changes prior to time t where negative (positive) changes have been replaced by zeroes.

  3. Shin et al. (2014, p. 291).

  4. For some other application of these methods see Bahmani-Oskooee and Zhang (2014), Gogas and Pragidis (2015), Durmaz (2015), Bahmani-Oskooee et al. (2015), Baghestani and Kherfi (2015), Al-Shayeb and Hatemi-J.(2016), Bahmani-Oskooee and Durmaz (2016), Lima et al. (2016), Nusair (2012, 2016), Aftab et al. (2017), Arize et al. (2017), Bahmani-Oskooee et al. (2017) and Gregoriou (2017).

  5. The positive coefficient in the linear model of Zambia indicates a disequilibrium model.

  6. Following previous research, we have used nominal price of oil to avoid any multilinearity that may exist between real oil price and real exchange rate. However, as a sensitivity analysis we also estimated each model using real price of oil. There was no significant change in our asymmetric analysis. These results are available from authors upon request.

References

  • Aftab M, Ahmad R, Ismail I, Ahmed M (2017) Exchange rate volatility and Malaysian-Thai bilateral industry trade flows. J Econ Stud 44:99–114

    Google Scholar 

  • Al-Shayeb A, Hatemi-J A (2016) Trade openness and economic development in the UAE: an asymmetric approach. J Econ Stud 43:587–597

    Google Scholar 

  • Arize AC, Malindretos J, Igwe EU (2017) Do exchange rate changes improve the trade balance: an asymmetric nonlinear co-integration approach. Int Rev Econ Finance 49:313–326

    Google Scholar 

  • Ayen YW (2014) The effect of currency devaluation on output: the case of Ethiopian economy. J Econ Int Finance 6:103–111

    Google Scholar 

  • Baghestani H, Kherfi S (2015) An error-correction modeling of US consumer spending: are there asymmetries? J Econ Stud 42:1078–1094

    Google Scholar 

  • Bahmani-Oskooee M, Durmaz N (2016) Exchange rate volatility and commodity trade between the U.S. and Turkey. Econ Change Restruct 49:1–21

    Google Scholar 

  • Bahmani-Oskooee M, Fariditavana H (2015) Nonlinear ARDL approach, asymmetric effects and the J-curve. J Econ Stud 42:519–530

    Google Scholar 

  • Bahmani-Oskooee M, Fariditavana H (2016) Nonlinear ARDL approach and the J-curve phenomenon. Open Econ Rev 27:51–70

    Google Scholar 

  • Bahmani-Oskooee M, Gelan A (2013) Are devaluations contractionary in Africa? Glob Econ Rev 42:1–14

    Google Scholar 

  • Bahmani-Oskooee M, Kandil M (2009) Are devaluations contractionary in MENA countries? Appl Econ 41:139–150

    Google Scholar 

  • Bahmani-Oskooee M, Miteza M (2003) Are devaluations expansionary or contractionary? A survey article. Econ Issues 8:pp. 1.28

    Google Scholar 

  • Bahmani-Oskooee M, Kones A (2014) Real and nominal effective exchange rates of african countries during 1971I-2012IV. Appl Econ 46:1961–1984

    Google Scholar 

  • Bahmani-Oskooee M, Mohammadian A (2016) Asymmetry effects of exchange rate changes on domestic production: evidence from nonlinear ARDL approach. Aust Econ Papers 55:181–191

    Google Scholar 

  • Bahmani-Oskooee M, Zhang R (2014) Is there J-curve effect in the commodity trade between Korea and rest of the world? Econ Change Restruct 47:227–250

    Google Scholar 

  • Bahmani-Oskooee M, Hegerty S, Hosny A (2015) The effects of exchange-rate volatility on industry trade between the U.S. and Egypt. Econ Change Restruct 48:93–117

    Google Scholar 

  • Bahmani-Oskooee M, Iqbal J, Khan S (2017) Impact of exchange rate volatility on the commodity trade between Pakistan and the U.S. Econ Change Restruct 50:161–187

    Google Scholar 

  • Bahmani-Oskooee M, Halicioglu F, Neumann R (2018) Domestic investment responses to changes in the real exchange rate: asymmetries of appreciation versus depreciations. Int J Finance Econ 23:362–375

    Google Scholar 

  • Bussiere M (2013) Exchange rate pass-through to trade prices: the role of nonlinearities and asymmetries. Oxford Bull Econ Stat 75:731–758

    Google Scholar 

  • Christopoulos DK (2004) Currency devaluation and output growth: new evidence from panel data analysis. Appl Econ Lett 11:809–813

    Google Scholar 

  • Durmaz N (2015) Industry level J-curve in Turkey. J Econ Stud 42(4):689–706

    Google Scholar 

  • El-Ramly H, Abdel-Haleim SM (2008) The effect of devaluation on output in the edyptian economy: a vector autoregression analysis. Int Res J Finance Econ 14:82–99

    Google Scholar 

  • Eltalla AHA (2013) Devaluation and output growth in Palestine: evidence from a CGE model. Eur J Bus Econ 8:26–31

    Google Scholar 

  • Gogas P, Pragidis I (2015) Are there asymmetries in fiscal policy hocks? J Econ Stud 42:303–321

    Google Scholar 

  • Gregoriou A (2017) Modelling non-linear behaviour of block price deviations when trades are executed outside the bid-ask quotes. J Econ Stud 44:206–213

    Google Scholar 

  • Gylfason T, Radetzki M (1991) Does devaluation make sense in the least developed countries? Econ Dev Cult Change Vol. 40, February:179–189

    Google Scholar 

  • Kalyoncu H, Artan S, Tezekici S, Ozturk I (2008) Currency devaluation and output growth: an empirical evidence from OECD countries. Int Res J Finance Econ 14:232–238

    Google Scholar 

  • Kim Y, Ying Y-H (2007) An empirical assessment of currency devaluation in East Asian countries. J Int Money Finance 26:265–283

    Google Scholar 

  • Lima L, Vasconcelos CF, Simão J, de Mendonça H (2016) The quantitative easing effect on the stock market of the USA, the UK and Japan: an ARDL approach for the crisis period. J Econ Stud 43:1006–1021

    Google Scholar 

  • Mejia-Reyes P, Osborn DR, Sensier M (2010) Modelling real exchange rate effects on output performance in Latin America. Appl Econ 42:2491–2503

    Google Scholar 

  • Miteza I (2006) Devaluation and output in five transition economies: a panel cointegration approach of Poland, Hungary, Czech Republic, Slovakia and Romania, 1993–2000. Appl Econom Int Dev 6:69–78

    Google Scholar 

  • Narayan PK, Narayan S (2007) Is devaluation expansionary or contractionary? Empirical evidence from Fiji. Appl Econ 39:2589–2598

    Google Scholar 

  • Nusair SA (2012) Nonlinear adjustment of Asian real exchange rates. Econ Change Restruct 45:221–246

    Google Scholar 

  • Nusair SA (2016) The J-curve phenomenon in european transition economies: a nonlinear ARDL approach. Int Rev Appl Econ 31:1–27

    Google Scholar 

  • Pal S (2014) Real exchange rate effects on output in India. J Quant Econ 12:168–174

    Google Scholar 

  • Pesaran MH, Shin Y, Smith RJ (2001) Bound testing approaches to the analysis of level relationship. J Appl Econom 16:289–326

    Google Scholar 

  • Rajan RS, Shen C-H (2006) Why are crisis-induced devaluations contractionary? Exploring alternative hypotheses. J Econ Integr 21:526–550

    Google Scholar 

  • Ratha A (2010) Does devaluation work in India? Econ Bull 30:247–264

    Google Scholar 

  • Shahbaz M, Islam F, Aamir N (2012) Is devaluation contractionary? Empirical evidence for Pakistan. Econ Change Restructuring 45:299–316

    Google Scholar 

  • Shin Y, Yu BC, Greenwood-Nimmo M (2014) Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework. In: Sickels R, Horrace W (eds) Festschrift in honor of Peter Schmidt: econometric methods and applications. Springer, New York, pp 281–314

    Google Scholar 

  • Upadhyaya KP, Rainish R, Kaushik N, Bhandari RN (2013) Exchange rate adjustment and output in South-East Asia. J Appl Bus Res 29:1223–1230

    Google Scholar 

  • Yaqub JO (2011) Anticipated and unanticipated exchange rate changes and output performance in Nigeria: an empirical analysis. J Econ Theory Medwell J 5:84–92

    Google Scholar 

  • Yiheyis Z (2006) The effects of devaluation on aggregate output: empirical evidence from Africa. Int Rev Appl Econ 20(1):21–45

    Google Scholar 

  • Yilanci V, Hepsag A (2011) The contractionary and expansionary effects of devaluation: empirical evidence from Turkey. J Econ Coop Dev 32:19–30

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. The Center for Research on International Economics and Department of Economics, The University of Wisconsin-Milwaukee, Milwaukee, USA

    Mohsen Bahmani-Oskooee

  2. College of Business, Department of Economics and Finance, Texas A&M University-Commerce, Commerce, TX, 75429, USA

    Augustine C. Arize

Authors
  1. Mohsen Bahmani-Oskooee
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Augustine C. Arize
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Mohsen Bahmani-Oskooee.

Appendix 1: Data definition and source

Appendix 1: Data definition and source

Sources used to collect the data:

a. IFS database

b. The Economist

c. Federal Reserve Bank of St. Louis.

d. Bahmani-Oskooee and Kones (2014).

Variables:

\(\varvec{Y}_{\varvec{i}}\) = Index of real GDP of relevant African country taken from source a above.

\(\varvec{M}_{\varvec{i}}\) = Real money supply defined as real M2. Nominal M2 figures in national currency are deflated by GDP deflator or Consumer Price Index of the relevant African country from source a and b above.

\(\varvec{G}_{\varvec{i}}\) = Real government spending. Nominal data in national currency are deflated by GDP deflator of the relevant African country from source a above.

\(\varvec{Oil}_{\varvec{i}}\) = Global crude oil prices taken from source c above.

\(\varvec{REX}_{\varvec{i}}\) = Real Effective Rate. The data come mostly from source (d). Missing periods are collected from sources a and f. By using overlapping observations, we have adjusted the data to make them compatible. By way of construction, a decline in REX reflects depreciation of domestic currency.

Quarterly data are used to carry out the empirical exercise. The list of countries and data period for each country is as follows:

Countries

Data period

Algeria

1987Q4–2015Q1

Cameroon

1985Q4–2014Q4

Ethiopia

1986Q2–2013Q3

Ghana

1985Q4–2014Q1

Kenya

1985Q3–2014Q1

Mauritius

1986Q2–2014Q1

Morocco

1987Q3–2014Q1

Nigeria

1986Q4–2015Q1

South Africa

1986Q4–2016Q1

Tanzania

1985Q4–2014Q1

Tunisia

1985Q3–2014Q1

Uganda

1993Q2–2013Q1

Zambia

1992Q1–2015Q1

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Bahmani-Oskooee, M., Arize, A.C. Asymmetric response of domestic production to exchange rate changes: evidence from Africa. Econ Change Restruct 53, 1–24 (2020). https://doi.org/10.1007/s10644-018-9240-y

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10644-018-9240-y

Keywords

JEL Classification

Search

Navigation