Does the Exchange Rate Regime Matter for East African Countries?
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Date
2018-10
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Addis Ababa University
Abstract
This study aimed at identifying whether the choice of exchange rate regime (ERR) matter
for the inflation and economic growth of East African countries and identifying which
regimes do best for the region. To do so it used the panel data of 10(ten) selected countries
observed from 1996-2016. It used descriptive statistics and econometric analysis techniques.
Even though the de-jure regime was much smaller than the de-facto, the study found that
intermediate regimes dominated other ERRs. Relatively the highest levels of inflation are
recorded in Malawi and Zambia while Uganda had the lowest inflation. The analysis also
shows that the highest average growth level was that of Mozambique and the lowest was
that of Burundi.
The study found that both the claim and practice of intermediate regimes are related to lower
inflation compared to pegged regimes. In the 'coarse' classification crawling regimes are
negatively related to inflation compared to pegged regimes. Moreover, estimation of the
'fine' classification shows de-facto crawling peg and crawling band are negatively related to
inflation compared to currency board arrangement. The study also found that de-facto
intermediate regimes are negatively related to economic growth. When the 'coarse'
classification of regimes is applied all intermediate regimes (i.e. crawling, managed floating
and free falling regimes) are negatively related to growth. However, when institutional
quality is controlled almost all the regime dummies of the 'fine' classification became
insignificant in the growth regression. The result implies that the choice of ERR should be
based on whether countries target either inflation or growth. Future researchers could focus
on "why countries choose regimes?".
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Keywords
Economic Growth, Exchange rate regime, Inflation