Effects of exchange relative prices on macroeconomic stability in sub-Saharan African countries

Abstract

This paper analyzes the effects of relative prices on macroeconomic stability in sub- Saharan African countries by considering inflation, real effective exchange rate, government deficit, and a composite index of macroeconomic stability using techniques combining a panel Vector Autoregressive (VAR) and the generalized method of moments (GMM) for 30 countries over the period 1991-2017. The results show that the terms of trade (external relative prices) have positive effects on the real exchange rate, the reduction of the public deficit, and on macroeconomic stability in general. Impulse response function analysis and variance decomposition confirm these different results.

Keywords

• sub-saharan africa
• relative prices
• macroeconomic stability
• economic growth
• terms of trade