Estimation of Equilibrium Exchange Rates in the WAEMU: A Robustness Analysis

By Magnus Saxegaard, Stephane Roudet, Charalambos G Tsangarides

August 1, 2007

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Magnus Saxegaard, Stephane Roudet, and Charalambos G Tsangarides. Estimation of Equilibrium Exchange Rates in the WAEMU: A Robustness Analysis, (USA: International Monetary Fund, 2007) accessed November 8, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Using the FEER approach we investigate the long-run equilibrium paths of the real effective exchange rates (REERs) of countries in the West African Economic and Monetary Union (WAEMU). In an attempt to address econometric estimation uncertainty, we employ both single-country (Johansen and ARDL) and panel-data (FMOLS and PMG) cointegration techniques. We find that (i) much of the long-run behavior of REERs in WAEMU countries can be explained by fluctuations in terms of trade, government consumption, investment, and productivity; (ii) the use of different econometric techniques suggests that there is significant uncertainty about the path of the underlying equilibrium REERs and the degree of exchange rate misalignment, which underscores the need for robustness analyses in exchange rate modeling; and (iii) results from panel-data cointegration may sometimes be useful, but should always be complemented with single-country estimations to ensure that the results take into account country-specific characteristics.

Subject: Exchange rates, Government consumption, Real effective exchange rates, Real exchange rates, Terms of trade

Keywords: Natural logarithm, Time series, WP

Publication Details

Pages:

54
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2007/194
Stock No:

WPIEA2007194
ISBN:

9781451867589
ISSN:

1018-5941

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