Real exchange rate undervaluation, regional integration and services sector performance: evidence from the East African Community
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Date
2022
Journal Title
Journal ISSN
Volume Title
Publisher
Journal of Economic Structures
Abstract
We undertake to estimate the efects of real exchange rate misalignment and regional
integration on the service sector performance in selected countries from East Africa
during the period of 1991–2017. The main fndings, based on the traditional Pooled
Mean Group ARDL technique as well as the alternative panel Cross-Sectional Autore-
gressive distributed lag (CS-ARDL) approach render support for an undervaluation-led
services sector performance as well as the importance of regional integration in the
observed linkage. Additional evidence reveals that both the monetary policy and
the fscal policy are key channels via which currency undervaluation impacts on the
services sector output. The existence of non-linearities in an inverted U-shaped curve
is equally confrmed in the data, where small and moderate undervaluations spur
service sector performance just as large undervaluations after some threshold hinder
it. Exchange rate volatility is found detrimental to the services sector in the long run.
Policies that would help promote the underlying catalysts of undervaluation, curtail
exchange rate volatility as well as those that promote deeper regional integration
should be strengthened. Likewise, undervaluation policies would yield optimal benefts
to the services sector once they are accompanied by well-calculated monetary and
fscal policies.
Description
Keywords
Real exchange rate, Undervaluation, Regional integration, East African Community
Citation
Nnyanzi, J. B., Oryema, J. B., & Kilimani, N. (2022). Real exchange rate undervaluation, regional integration and services sector performance: evidence from the East African Community. Journal of Economic Structures, 11(1), 17. https://doi.org/10.1186/s40008-022-00279-3