Impact of external resources on the real exchange rate

This study analyzes the role played by governance and the nature of the exchange rate regime in the impact of external resources on the real exchange rate in ECOWAS countries. It is based on a dynamic panel model estimated according to the GMM methodology of Blundell and Bond (1998). The results reveal that the various external resources have a positive impact on the real exchange rate of ECOWAS countries and therefore, affect their external competitiveness. It also appears that improved governance, both at the aggregate level and at the level of dimensional indicators, contributes to improved competitiveness following a massive influx of external resources. Using the IMF’s IRR (Ilzetzki, Reinhart and Rogoff, 2008) on exchange rate arrangements and restrictions as a measure of the nature of the exchange rate regime, we find that a less flexible exchange rate helps to dampen the appreciation of the real exchange rate resulting from the inflow of external resources.