Exchange Rate Crisis among Inflation Targeting Countries in Sub-Saharan Africa

Abstract

The exchange market pressure index has proven to be a major indicator in identifying exchange rate crises in economies; however, due to the complexities surrounding developing economies, the efficacy of the index has been called to question. Specifically, the selection of an appropriate index and the problem of selecting the appropriate threshold for identifying exchange market pressure. To investigate this issue, this study identifies exchange rate crisis episodes in South Africa and Ghana using ridge regression, a discrete threshold regression, and Dynamic Ordinary Least Square (DOLS) models. The results are robust in resolving the problems with an exchange market pressure index. They also point to uneven implementation of the inflation targeting policy framework in the studied countries.