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Enrique Gelbard and Jun Nagayasu are economists in the African and the Monetary and Exchange Affairs Departments, respectively. Part of this paper was written when Mr. Nagayasu was in the African Department. We would like to thank Sérgio Pereira Leite for his guidance and encouragement to carry out this research. We are also indebted to David Coe, Andrei Kirilenko, Alfredo Leone, Ian McCarthy, Angel Ubide-Querol, and Luisa Zanforlin for valuable comments on an earlier draft of the paper. Thomas Walter provided helpful editorial suggestions. The usual disclaimer applies.
Until May 24, 1999, the central bank set the official exchange rate but was not able to deliver the amount of foreign exchange demanded at that rate, leading to rationing of official reserves. In addition, most trade and invisible transactions were subject to surrender requirements and prior approval by the central bank. On May 24, 1999, the central bank stopped setting the official exchange rate, leading to the virtual unification of the foreign exchange market. During the 1992–98 period, the parallel market exchange rate was, on average, 2.9 times higher than the official rate.
High correlations among changes in the money supply, domestic prices, and the nominal parallel market rate have been observed in a sample with a small number of observations (Ferrari, 1998).
The FEER essentially embodies a medium-run current account theory of exchange rate determination. The use of the basic balance in the definition of external balance is essentially the same as using a medium-term equilibrium concept of the current account where the latter becomes equal to the desired or target rate of accumulation of net long-term foreign assets (see, for instance, Faruquee, 1994). The model used here does not address the issue of internal balance.
Lack of data on other potential determinants of the real exchange rate including output developments in the oil sector and the destruction of productive capacity in the non-oil sector preclude the inclusion of these variables in the analysis.
A large part of Angola’s external debt is guaranteed with oil at market interest rates plus a premium, implying that changes in foreign interest rates have a direct impact on the balance of payments. Similarly, changes in the foreign interest rate could affect direct foreign investment flows through their effect on investment projects’ internal rates of return. However, foreign exchange restrictions isolate Angola’s financial system from the rest of the world, which suggests that the traditional role ascribed to trade in financial assets is not relevant here.
In other words, stock equilibrium is not required, and the current account need not necessarily equal zero. This approach is essentially consistent with a given rate of accumulation of net foreign debt d that reflects, for instance, the country’s long-term investment opportunities. For given values of the price and output of oil, the foreign interest rate, and the stock of net foreign assets, the equilibrium level of the real exchange rate is the one that makes the current account equal to -d.
Official denomination of Angola’s currency as of May 1999.
MacDonald and Nagayasu (1999), for instance, find that longer-term interest rates are more relevant in a long-run or equilibrium study.
These results are consistent with findings from other individual African countries (Nagayasu, 1998). The non-rejection of the unit root for the real exchange rate in this study may be partly due to a short sample period.
If this condition is not met, there is some possibility that the time series may well be co-integrated of an order higher than one (see Johansen 1995, for example).