Sources of Real Exchange Rate Volatility in Africa: The Case of ECOWAS*

Abstract: This study examines the impact of (real) demand shocks, (aggregate) supply shocks, and monetary shocks on real exchange rates in 13 West African countries. We observe that the real demand shocks explain most of the fluctuations in real exchange rates in all these countries. Accordingly, policymakers should adopt a careful demand management strategy by controlling government expenditure and taxes.     

Price convergence in US cities: a cointegration approach with two structural breaks

This article investigates how the price indices of major cities of the US respond to the shock from a city and from monetary policy. We find that the crisis of Bretton Woods system in 1968 and the oil crisis in 1974 should be incorporated as structural breaks in monetary policy variables and price indices. Using cointegration technique with structural break in our aggregated data, we find that the average half-life is 1.75 years, which is closer to what some of others found in disaggregated data, and that the interest rate is an effective tool for controlling cities’ price in short run.     

Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities

This paper develops a unified structure to examine the interrelationships between current account, foreign investment, and domestic capital accumulation. In particular, we develop a two‐country, two‐period model with international mobility of both physical and financial capital, and endogenous domestic capital accumulation. We consider cases where (i) current account is endogenous, but foreign investments are exogenous, and (ii) current account is exogenous, but foreign investments are endogenous. For (i), we examine how inflow and outflow of foreign physical capital affects current account. For the second case, we examine how an increase in current account deficit affects foreign investments. The complementarity or substitutability of foreign capital and domestic capital turns out to be crucial to the relationship between current account deficit and foreign investment.     

Elasticity of Substitution and the Persistence of the Deviation of the Real Exchange Rates

Empirical evidence suggests (i) that the real exchange rates of developing economies show less persistence than do those of more advanced economies, and (ii) that the elasticity of substitution between capital and labor tends to increase from below unity for less developed economies to above one for more advanced economies. This paper shows how the introduction of sectoral adjustment costs in a two‐sector model of a small open economy, together with CES production functions, provides a very natural explanation of this empirical regularity. Other aspects of the relationship between the technologies and the speed of convergence of the real exchange rate are also discussed.     

Price convergence among Indian cities: A cointegration approach

Price dynamics in Indian cities were examined using cointegration analysis. We identified and calculated a common trend for prices in 25 major cities in India. Impulse response functions were obtained to calculate the rates of convergence to the prices and we found that the half-life of any shock is very small for Indian cities. Although a close to 3-month half-life seems too fast, there is some indication in the literature that half-life can be much smaller than the conventional rates of 3–5 years. We have calculated half-life using the panel unit root method, and found that estimates of half-life from cointegration analysis provide a faster convergence rate than estimates using the panel unit root method. We also analyzed how shock can be transmitted from one city to another and found no systematic behavior of transmission from one city to another.     

Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy

This paper develops a two-sector model in which intersectoral capital movements involve adjustment costs, expressed as capital lost in the transformation process. These costs have important consequences for the dynamics of capital accumulation and particularly for real exchange rate dynamics. Persistent deviations of the real exchange rate from its equilibrium are derived and for plausible values of the adjustment cost parameters are consistent with the observed degree of real exchange rate persistence. For low adjustment costs the dynamics are qualitatively similar to those of the standard Heckscher-Ohlin technology. For high adjustment costs, the model converges to the specific-factors model. Thus our framework includes these two standard models as polar extremes.     

Economic integration in Africa

There is a renewed interest in the debate on integration in Africa since the creation of the African Union in 2002. This study investigates the feasibility of a full-fledged economic union in Africa. Towards this goal, we examine the short- and long-term relationships among key macro-variables in eight largest African economies during the period from 1976 to 2005. We observe the existence of common long-term trends in real output, price level, private consumption, government consumption, investment and trade flows among these eight countries. In addition, we observe that there exists common cycles (short-term relationships) in real output, investment and trade flows for these countries. These two critical findings indicate the presence of macroeconomic interdependence among these countries which is a crucial factor for the success of integration in Africa led by these eight countries.     

Reprint to: Infrastructure provision and macroeconomic performance

This paper studies the differences between private and government provision of infrastructure. Capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy. A subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed. The case for private provision is much stronger in economies characterized by high levels of congestion. The choice between private and government provision also has a crucial effect on the design of optimal fiscal policy.     

Microfinance and missing markets

The existing theoretical analysis of microfinance focuses on the nature of the loan contract such as group liability. We draw attention to the role of missing or imperfect labour markets in understanding some of the important “second generation” debates in microfinance. Our analysis helps explain a number of puzzles in microfinance including high repayment rates with high interest rates, difficulties in scaling up projects, limited economic impact on borrowing households, low take‐up rates in recent microcredit programs, conflicting views about the interest rate elasticity of demand, and spurious mission drift. Microcredit can play a role when labour markets are underdeveloped, but it may also hinder structural transformation.     

Are Bangladesh,India and Pakistan Ready to Adopt the UNCITRAL Model Law on Cross‐Border Insolvency?

The development of business laws in key markets has not kept pace with the exponential growth of foreign investment they have experienced. Countries such as Brazil, Russia and China either do not consider the issue of cross‐border insolvency in their legislation or they explicitly provide for a ‘territorialist’ approach to cross‐border insolvency proceedings, whereby each country grabs local assets for the benefit of local creditors, with little consideration of foreign proceedings. This has led to uncoordinated, expensive attempts at cross‐border reorganisation. The UNCITRAL Model Law on Cross‐Border Insolvency (1997) was adopted with the objective of modernising international insolvency regimes and enhancing cross‐border cooperation. In its 19 years of existence, it has been adopted by 41 countries in a total of 43 jurisdictions but by none of the BRIC states or the ‘Next‐11’ nations of Bangladesh and Pakistan. While it has entered into policy‐level discussion in China, India and Russia, it would seem that there is still scepticism regarding the efficacy and suitability of the Model Law for adoption into their national systems. This paper seeks to establish whether the Model Law can adequately plug, what Steven Kargman calls, ‘the glaring gap in the international insolvency architecture’, looking particularly at the context of the South Asian states of India, Bangladesh and Pakistan. It will question whether its adoption will improve the ability of these jurisdictions to handle the challenges of cross‐border insolvencies, especially in light of their existing legal landscape, their market policy objectives and the existing alternatives available to the Model Law. Copyright © 2016 INSOL International and John Wiley & Sons, Ltd.