Threshold-based asymmetric reactions of trade balances to currency devaluation: fresh insights from smooth transition regression (STR) model

Abstract

ABSTRACT This study sought to ascertain relatively the asymmetric reactions of trade balances to currency devaluation and non-devaluation regimes in sub-Saharan African (SSA) countries between 1981 and 2021 using the smooth transition regression (STR) model. The outcome indicates that, in Ghana, Malawi, and Mozambique, currency devaluation as a change in policy has a major influence on the trade balance; however, in Nigeria, Kenya, and Tanzania, this impact is negligible. Nigeria had the highest gamma coefficient but insignificant, suggesting that policy change has not significantly impacted the country’s trade balance despite the high transition rate. Findings from the devaluation regime revealed that, with the exception of Ghana, all other nations’ real exchange rates are inversely and significantly related to the trade balance. Additionally, it displayed an average threshold parameter of 0.147, indicating that a devaluation of more than 14.7% within a year will deteriorate the trade balance in SSA. The results indicate that the devaluation effects hinge on the structure, macroprudential policies, and infrastructural growth of the nation. The study recommended amongst other things, (i) a robust structural transformation in key sectors (ii) judicious investment in infrastructural development to address the key bottleneck in the quality and quantity of domestic production.