Sources of macroeconomic fluctuations and stabilization policies in African economies
Date
2016-01-29
Authors
Rasaki, Mutiu Gbade
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Abstract
The thesis focuses on the sources of macroeconomic uctuations in ten (10)
selected African economies over the period 1990-2011. Data for the study
were obtained from the International Financial statistics (IFS), the World
Bank, and Central Bank database of the selected countries. We formulate
a dynamic stochastic general equilibrium (DSGE) model for the thesis. We
estimate the model using quarterly time series data. Due to data availability,
the sample size di¤ers from one country to the other. First, we investigate
the relative contributions of internal and external shocks to economic uc-
tuations in African economies. Second, we evaluate the signi cance of the
balance sheet channel in African economies. Third, we investigate the ef-
fectiveness of sovereign wealth funds in reducing macroeconomic volatility
caused by commodity price shocks. The thesis has 5 chapters. Chapter 1 is
the general introduction. Chapters 2, 3, and 4 are stand-alone related papers
on macroeconomic uctuations. Chapter 5 is the conclusion.
Chapter 1 introduces the study. We discuss the research problem, the moti-
vation, the objectives, and the research questions. We also explain both our
theoretical and empirical contributions to the literature. Moreover, we high-
light the signi cance and the key ndings of the study. Finally, we conclude
the chapter with a brief outline on the organisation of the study.
Chapter 2 investigates the relative contributions of internal and external
shocks to macroeconomic uctuations in African economies. We formulate
and estimate a monetary DSGE model to examine the sources of economic
uctuations in ten African countries. The model is estimated with the
Bayesian technique using twelve macroeconomic variables. Generally, the
ndings indicate that both the internal and external shocks signi cantly in-
uence output uctuations in African countries. Over a four quarter horizon,
internal shocks are dominant while over eight to sixteen quarter horizons, the
external shocks are dominant. Among the external shocks, external debt, ex-
change rate, foreign interest rate and commodity price shocks account for a
large part of output variations in African economies. Money supply and
productivity shocks are the most important internal shocks contributing to
output uctuations in African countries. To ensure macroeconomic stability,
African countries need to formulate appropriate exchange rate and exter-
nal debt management policies, diversify the economies, and create sovereign
wealth funds (SWFs) or use hedging instruments.
Chapter 3 evaluates the quantitative signi cance of the balance sheet chan-
nel in African economies. We construct an open economy monetary DSGE
model where entrepreneurs nance investment by issuing foreign currency-
denominated debt. The model is estimated with Bayesian technique. The
evidence suggests that the balance sheet e¤ects are empirically important in
African economies. The marginal likelihood results clearly favour the model
with nancial frictions. Moreover, the ndings indicate that the balance
sheet e¤ect reduces the e¤ectiveness of monetary policy, raises the sensitiv-
ity of the risk premium to external debt, and contracts output. This indi-
cates that exchange rate depreciation is contractionary in African economies.
We conclude that African countries should reduce their exposure to foreign
currency-denominated debt and also deepen their domestic bond markets.
Chapter 4 investigates the e¤ectiveness of sovereign wealth funds (SWFs) in
reducing macroeconomic volatility in commodity exporting African countries.
We formulate and simulate a dynamic stochastic general equilibrium (DSGE)
model that features SWFs. The simulation results suggest that the creation
of SWFs can reduce macroeconomic volatility in commodity exporting coun-
tries. Particularly, SWFs can reduce government expenditure, real exchange
rate, and external debt volatility. Since these are the channels through which
commodity price shocks are transmitted to the African economies, we rec-
ommend that African countries should create SWFs to sterilize the in ow of
commodity revenue and to prevent the resource curse problem.
Chapter 5 concludes the study. We summarize the key ndings in Chapters
2, 3, and 4. We highlight the policy implications of our ndings. Finally, we
suggest areas for further research.
Description
A thesis submitted to the Faculty of Commerce, Law and Management,
University of the Witwatersrand, Johannesburg, in Ful llment of the
Requirements for the Degree of Doctor of Philosophy in Economics
15 July, 2015
Keywords
Stochastic General Equiibrium Model, DSGE model, Economic fluctuations, Africa, Internal shocks, External shocks, Resource curse