The Inflationary Effects of Effective Exchange Rate Depreciation in Selected African Countries

This paper investigates the long?run relationship between the nominal effective exchange rate and domestic inflation in selected African countries. Given that the study period is 1979-97, data availability is very limited. A new panel data cointegrating technique proposed by Pedroni is employed which lessens the likelihood of accepting non?stationarity on account of limited test power. We find that effective exchange rate depreciation is inflationary but this is unlikely to outweigh the gains from increased price competitiveness. The results also point towards limited effectiveness in monetary policy controlling inflation. Finally, the Pedroni methodology is expanded through the estimation of panel data error correction models that indicate a fairly sluggish adjustment towards long?run equilibrium.