On the Relation between Nominal Devaluation and Real Devaluation: Evidence from African Countries

A country devalues its currency with an expectation that it will gain international competitiveness and increase its exports. However, the inflationary effects of devaluation could curtail its favourable effects unless nominal devaluation leads to real devaluation. In this paper, we consider the experiences of 21 African countries. After constructing the real and nominal effective exchange rates over the 1971I–2004III period, we employ the bounds-testing approach to cointegration and show that in almost all countries nominal devaluation leads to real devaluation in the short run. However, the short-run effects last into the long run only in three countries.