Commodity terms of trade shocks and real effective exchange rate dynamics in Africa's commodity-exporting countries

• Published in: Resources policy Vol. 68; p. 101801
• Main Authors: Kassouri, Yacouba, Altıntaş, Halil
• Format: Journal Article
• Language: English
• Published: Kidlington Elsevier Ltd 01.10.2020; Elsevier Science Ltd
• Subjects: Absorption cross sections; Agricultural management; Appreciation; Asymmetry; Commodities; Commodity markets; Commodity terms of trade; Comparative studies; Competition; Competitiveness; Depreciation; Energy; Exports; Fiscal policy; Food; Foreign exchange rates; Heterogeneity; Macroeconomics; Metals; Primary commodity prices; Real effective exchange rate; Subgroups; Terms of trade; Africa; C33; F41; Real effective exchange rate; Asymmetry; F31; Primary commodity prices; Commodity terms of trade
• ISSN: 0301-4207; 1873-7641
• DOI: 10.1016/j.resourpol.2020.101801

Motivated by the absence of conclusive guidance from the current literature, this study revisits the effects of terms of trade shocks on real effective exchange rates (RER) across twenty-three primary commodity-exporting countries in Africa. To address the heterogeneity across primary commodities that may have plagued earlier studies, we employed a nonlinear panel ARDL approach to capture both the cross-section and time variations across primary commodities. Our analysis offers three main finding patterns. Firstly, we highlighted that the response of the RER to terms of trade shocks is asymmetric: the real appreciation is more pronounced for positive than negative shocks in terms of trade in the long-run while negative shocks in terms of trade cause the RER to depreciate in the short-run. Secondly, we found that the asymmetric responses of RER differ across commodity subgroups and seem to matter more for energy-exporting countries. Finally, we showed that energy and metal commodity-exporting subgroups are the most subject to real appreciation in the long run in comparison to countries exporting soft commodities such as agricultural and, food and beverage commodities. A fundamental policy corollary follows that there is a need to remediate the loss of the external competitiveness associated with real appreciation by coordinating monetary and fiscal policies to effectively absorb the huge additional foreign reserves and ensure an exchange rate equilibrium level, which will bring macroeconomic stability in primary commodity-exporting countries. •The commodity-currency hypothesis is valid for primary commodity-exporting countries in Africa.•The asymmetric responses of real exchange rates seem to matter more for energy-exporting countries.•Extractive commodity-exporting subgroups are the most subject to real appreciation in the long-run.•Foreign direct investments inflows have a less harmful impact on the dynamics of real exchange rates.