Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)


LSDVC Estimation of the Interaction Effect of Exchange Rate and Trade Openness on Fiscal Discipline: Dynamic Panel Models

Author(s): Mahmoud Abdelrehim, Mohamed Hisham Dato Haji Yahya

The conventional theoretical framework, as well as the world bank and IMF claim that the floating exchange rate is considered the best choice to achieve the fiscal discipline in light of the trade openness. Accordingly, the world bank and the IMF call the developing countries through the economic reform programs to adopt the floating exchange rate which would depreciate their currencies as they predominantly overvalued. The world bank and the IMF believe that the interaction effect between exchange rate depreciation and trade openness will oblige the governments to limit their public expenditure according to their public revenues which help to achieve the fiscal discipline. However, the empirical literature introduced mixed result. This study seeks to reinvestigate the interaction effect of between the exchange rate movements and the trade openness in the African countries which have adopted the floating exchange rate regime. The study relied on the LSDVC estimator to estimate the model results. The results revealed that in light of the trade openness the exchange rate depreciation does not always success to achieve the fiscal discipline.

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