Real Exchange Rate And Trade Balance In Sierra Leone An Empirical Investigation

This study has analysed time-series models of trade balance and real exchange rate in therneconomy of Sierra Leone. More specifically, an attempt has been made to analyse thernimpact of exchange rate misalignment on the trade balance. The study also examines thernrole of real and nominal disturbance in explaining the movement of the real exchange raternin Sierra Leone.rnThe study employs the Johansen maximum likelihood procedure in multivariate model tornarrive at the long run model. Also, the Hendry’s general-to –specific method was used inrnorder to get the short run model.rnResults of the study suggest that net capital inflow tends to appreciate the real exchangernrate, while both the terms of trade and openness (which is a proxy for trade policy) tends tornhave a depreciating effect on the real exchange rate. Moreover, the error correction modelrnshows that nominal devaluation and excess supply of domestic credit have significantrneffects on the real exchange rate. Nominal devaluation tends to depreciate the realrnexchange rate, while excess supply of domestic credit tends to appreciate it. Further more,rnthe impact of the civil war has a depreciating effect on the real exchange rate. The studyrnalso reveals that the real exchange rate has been misaligned.rnIn the trade balance equation, real income tends to improve the trade balance, while realrnmoney supply has a deteriorating effect on the trade balance. Also, the real exchange raternmisalignment variable was found to have a deteriorating effect on the trade balance. In the error correction model, both the real exchange rate misalignment and the dummy for warrnvariables tend to have a deteriorating effect on the trade balance

Get Full Work

Report copyright infringement or plagiarism