Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries

The objective of this study is to analyze the role of exchange rate regime on real exchange rate misalignment in sub-Saharan African (SSA) countries. At first, to determine equilibrium exchange rates, we use the BEER (Behavioral Equilibrium Exchange Rate) approach and the estimation techniques following the Cross-Sectional Augmented-Autoregressive Distributed Lags (CS-ARDL) approach that accounts for time dynamics, cross-sectional heterogeneity, and cross-sectional dependence. Then, the degree of exchange rate misalignment is evaluated. Finally, the system Generalized Method of Moments (GMM) estimation method is used to determine the role of exchange rate regime on exchange rate misalignment. The results show that countries have an average overvaluation of 9.52%. Furthermore, real exchange rate misalignment is larger and more persistent in countries with fixed exchange rate regimes than in countries with floating exchange rate regimes. A more flexibility currency is associated with less real exchange rate misalignment. As a policy implication, SSA countries need to prioritize floating (flexible or intermediate) over fixed regimes to contain the level of real exchange rate misalignment and to correct the real exchange rate misalignment persistence.