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Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa
Author(s) -
Ibhagui Oyakhilome
Publication year - 2019
Publication title -
african development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.654
H-Index - 32
eISSN - 1467-8268
pISSN - 1017-6772
DOI - 10.1111/1467-8268.12393
Subject(s) - government spending , economics , exchange rate , depreciation (economics) , consumption (sociology) , productivity , government (linguistics) , investment (military) , transfer payment , monetary economics , yield (engineering) , macroeconomics , econometrics , capital formation , economic growth , human capital , market economy , social science , linguistics , philosophy , materials science , sociology , financial capital , politics , political science , law , welfare , metallurgy
Abstract Do government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.

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