Exploring exchange rate based policy coordination in SADC
Abstract
Purpose
This paper explores the possibilities for policy coordination in the Southern African Development Community (SADC) as well as real effective exchange rate (REER) stability as a prerequisite towards sensible monetary integration. The underlying hypothesis goes with the assertion that countries meeting optimum currency area conditions face more stable exchange rates.
Design/methodology/approach
The quantitative analysis encompasses 12 SADC member states over the period 1995-2012. Correlation matrixes, dynamic pooled mean group (PMG) and mean group (MG) estimators and real effective exchange rate (REER) and real exchange rate (RER) equilibrium and misalignment analysis are carried out to arrive at the conclusions.
Findings
The study finds that the structural variables used in the PMG model show that there are common fiscal and monetary policy variables that determine REER/RER in the region. However, the exchange rate equilibrium misalignment analysis reveals that SADC economies are characterised by persistent overvaluation at least in the short term. This calls for further sustained policy coordination in the region.
Practical implications
The findings in this paper have important policy implications for economic stability and for the attempt of policy coordination in SADC region for the proposed monetary integration to proceed.
Originality/value
This study is the first attempt that relates the exchange rate as a policy coordination instrument among SADC economies.
Keywords
Acknowledgements
The authors would like to acknowledge the guest editor of the Journal of Studies in Economics and Finance and the anonymous reviewers for their valuable comments and suggestions that enriched the final version of this article. The earlier version of this article is published as a working paper of Economic Research Southern Africa (ERSA). The authors gratefully acknowledge financial support from ERSA in respect of this paper. The authors would like to thank the editor in chief and the anonymous referees of ERSA for their valuable comment. This article has also benefited from the valuable comments suggested by the participants at 6th World Finance Conference, held in Singapore, from 12-13 December 2014.
Citation
Zerihun, M.F., Breitenbach, M.C. and Kemegue, F. (2016), "Exploring exchange rate based policy coordination in SADC", Studies in Economics and Finance, Vol. 33 No. 4, pp. 576-594. https://doi.org/10.1108/SEF-03-2015-0089
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited