Currency substitution in selected African countries - Emerald

Variables
Countries m 2 y i p e De e
Ghana 1 27.679 0.0990 27.5440 20.1884
(244.01 * )
Kenya 1 28.565 0.0541 5.1068 20.0519
(1.75)
Morocco 1 22.587 20.0213 1.0314 0.0576
(1.75)
Nigeria 1 20.033 20.0468 0.8697 0.0314
(4.86 * )
Tunisia 1 20.435 1.1058 23.9735 20.0157
(20.24)
Zambia 1 27.167 0.0100 0.0157 20.0043
(21.49)
Notes: The anchor currency is US dollar; for consistency in our results and analysis, we follow the
same specifications as those used in determining the number of cointegrating vectors. To save space,
we have reported vectors that make economic sense; * denotes significance at the 5 percent level
Currency
substitution
625
Table III.
Normalized cointegrating
vectors
money demand. These effects persist although with a low intensity. In addition, all
these responses are within a 95 percent confidence interval. This indicates that our
model performs well in describing the behavior the real money demand function. On
the other hand, the VDF show that the variations in the domestic real balances are
essentially determined by fluctuations in real output that accounts for about 60 percent
of variations in real demand. Consequently, we believe that Egypt should design her
monetary policy focusing mainly on domestic factors such as real output.
4.1.2 Ghana. The model for Ghana is given by:
0:010 þ 0:909y t 2 0:027i t 2 0:430p e t 2 0:119De e t
m 2 ¼
ð0:004Þ ð0:62Þ ð20:71Þ 24:78 * 26:83 * :
We note that the coefficient for expected depreciation of exchange rate is negative and
highly significant. This indicates currency substitution between the Ghanaian Cedi
and the CFA franc, which has effects on the money demand function. Monetary
authorities cannot operate an independent monetary policy as external variables have
significant influence on the money demand. Therefore, they should implement policies
that take into account evolution into economies of countries using the CFA franc.
People of Ghana find the use the CFA franc in conducting their transactions profitable.
This is probably due to the fact that Ghana has borders with the CFA franc countries.
Also the average inflation of 35 percent in Ghana would encourage people to hold a
more stable currency. Bank of Ghana should ensure that domestic inflation does not
diverge a great deal from the inflation rate of economies using the CFA franc.
Moreover, IRFs in Figure 2 reveal that innovations in expected inflation and
expected change in exchange rate create a negative and persistent effect on money
demand throughout from the short-run till the long-run. Innovations in both real output
and T-bill rate positively affect the domestic real money demand from the 4th quarter