Publications

December 10, 2010

Foreign Aid And The Real Exchange Rate In The West African Economic And Monetary Union

This paper examines the relationship between foreign aid and the real
exchange rate to determine how the competitiveness of the West African Economic
and Monetary Union (WAEMU) is affected by foreign aid.

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Author:Eberechukwu Uneze

Publication Date: September, 2010

JEL Classification: C23, F31, F35

Key words: Foreign Aid; Real Exchange Rate; Pooled Mean Group

Document Size: 38 pages

The aim of this paper is to re-examine the relationship between foreign aid andthe real exchange rate, using the recent econometric methods developed for nonstationarydynamic panels and an estimator that imposes a weaker homogeneityassumption on the slope coefficients. The investigation shows that foreign aid ledto an appreciation of the real exchange over the period 1975-2005. In addition,the paper finds that other variables, such as labour productivity (a proxy forBalassa-Samuelson effect), terms of trade improvement, and governmentconsumption of non-tradable goods are also associated with an appreciation ofthe real exchange rate. To avoid an appreciation of the real exchange rate and adecline in competiveness, we recommend that WAEMU countries use foreignexchange from aid inflows to import capital goods, which will not only lead toexport expansion, but also to faster economic growth.



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