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

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Kassourı Y., Altıntaş H.

Resources Policy, cilt.68, ss.1-17, 2020 (SSCI İndekslerine Giren Dergi)


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.