DEVALUATION AND CONSUMER PRICES
DEVALUATION AND CONSUMER PRICES

Summary/Abstract: In this paper, we estimated the impact of daily and weekly exchange rate devaluations on consumer prices in Africa using 20 African nations as case studies which included Angola, Benin Burkina Faso, Cameroun, Chad, Congo Republic, Cote d'Ivoire, Egypt, Gabon, Ghana, Malawi, Mali, Namibia, Niger, Nigeria, Rwanda, South Africa, Senegal, Togo, and Tunisia. This study used a multivariate DCC-GARCH model. Over the long and short terms, it was discovered that devaluation had a detrimental impact on consumer prices. The study obtained a 100% response of consumer price level to exchange rate devaluation. In particular, the dynamic response of consumer price level to devaluation of currencies was complete as 100% variation in consumer prices was totally accounted for by devaluation of currencies. With both daily and weekly data, the study established that devaluation is a direct and significant predictor of the changes in consumer prices in Africa. We observed volatility persistence with shifting conditional correlations for both consumer prices and currency devaluation. Except for Senegal, other countries studied showed that volatility of currency devaluation and consumer prices at one time or the other (short or long run or both) had recognizable patterns of behavior that can be associated with the other whether inversely or directly. All countries examined have movements in exchange rate devaluation and consumer prices time-varying conditional correlation. Additionally, innovations in a currency devaluation and consumer prices significantly increase impulse responses in themselves during future days and weeks.

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