Real exchange rates, trade balance and capital flows in Africa

We analyze the intertemporal causal relationships between the real exchange rate and trade balance and cross-border capital flows in Africa. We use annual data of nine major African countries for the period 1993-2009. Through panel VAR techniques, we document some causality from real exchange rates to cross-border flows of African countries. Results however differ amongst the three kinds of flows examined and are not uniform across different country clusters. Our findings lend support to the classical balance of trade theoretical view in which the net effect of a depreciation of the domestic currency is an improvement in the domestic country's balance of payments position in the short-run. (C) 2012 Elsevier Inc. All rights reserved.