Real Exchange Rate and Trade Balance in Sierra Leone: An Empirical Investigation
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Date
2003-06
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Abstract
This study has analysed time-series models of trade balance and real exchange rate in the
economy of Sierra Leone. More specifically, an attempt has been made to analyse the
impact of exchange rate misalignment on the trade balance. The study also examines the
role of real and nominal disturbance in explaining the movement of the real exchange rate
in Sierra Leone.
The study employs the Johansen maximum likelihood procedure in multivariate model to
arrive at the long run model. Also, the Hendry’s general-to –specific method was used in
order to get the short run model.
Results of the study suggest that net capital inflow tends to appreciate the real exchange
rate, while both the terms of trade and openness (which is a proxy for trade policy) tends to
have a depreciating effect on the real exchange rate. Moreover, the error correction model
shows that nominal devaluation and excess supply of domestic credit have significant
effects on the real exchange rate. Nominal devaluation tends to depreciate the real
exchange rate, while excess supply of domestic credit tends to appreciate it. Further more,
the impact of the civil war has a depreciating effect on the real exchange rate. The study
also reveals that the real exchange rate has been misaligned.
In the trade balance equation, real income tends to improve the trade balance, while real
money supply has a deteriorating effect on the trade balance. Also, the real exchange rate
misalignment variable was found to have a deteriorating effect on the trade balance. In the error correction model, both the real exchange rate misalignment and the dummy for war
variables tend to have a deteriorating effect on the trade balance
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Economic Policy Analysis