Fundamentals and Misalignment of the Real Effective Exchange Rate in the Democratic Republic of Congo

Abstract

This study aims to assess the determinants of the real exchange rate and to study the impact of exchange rate misalignment on economic growth in the DRC over the period from 1980 to 2020. This article uses a dual methodology to achieve its objective, first the BEER (Behavioral Equilibrium Exchange Rate) approach of Clark and Mc Donald to determine the fundamentals of TCER, then the approach of Lawson to assess the impact of misalignment of the exchange rate on economic growth based on the augmented Solow endogenous growth model. In view of the results obtained using econometric modeling (Cointegration, VCEM and ARDL), it has been observed that there is a long relationship between the real effective exchange rate (REER) and its fundamentals. In addition, the results of the REER fundamentals (relative productivity, term of trade, public expenditure and foreign exchange reserves) verify the Balassa-Samuelson effect in the DRC. In addition, the misalignment of the exchange rate exerts a negative impact on real GDP growth in the DRC. However, a disaggregation of the REER misalignment shows that exchange rate depreciation strengthens economic activity while an appreciation constrains economic growth in the DRC.