1. Introduction

In recent years, the issue of climate change has come to the fore because of its importance for the implementation of public policies.

All countries are affected by global change but in different ways. Despite the efforts made by developing countries, they are still lagging behind others. However, the damage caused by global change influences the monetary anchor and pushes central banks to use their instruments, namely the interest rate and the money base [3]

Some economists believe that systematic currency depreciation would be beneficial for growth in developing countries [11]. This idea has been criticized for being unfavorable to the poorest, who are particularly hard hit by real depreciation, for weakening institutions and generating corruption, and for being difficult to maintain in the long term.

Very few studies examine the impact of such a policy on the climate. All this leads us to a major reflection. What is the impact of exchange rate policy on global change between African and non-African countries?

The purpose of this article is twofold. On the one hand, to verify whether the type of exchange rate policy influences global change. Second, is there a link between exchange rate policy and the effectiveness of climate change mitigation or adaptation policies? It is to these two questions that we will try to answer, in the absence of a confirmed literature on this subject.

This article is divided into four sections. The first section highlights the literature review. The second section deals with the data, variables and methodology. The results are presented in the third section and the final section concludes.

• Climate change and exchange rate policy: Theoretical background and transmission channel

     Even if developing countries, particularly low-income countries, are not responsible for global change, it is only natural that they should be concerned about the conformity of their sustainable development strategy with global climate objectives. There are two ways of combating global change: reducing CO2 emissions or increasing its capture, notably through forest cover.

• Exchange rate and CO2 emissions

Real currency depreciation in low-income countries tends to increase CO2 emissions, unlike in developed countries [2]. Moreover, the unfavorable effect of real depreciation is more specific to African countries.

Generally speaking, CO2 emissions are higher for tradable goods than for non-tradable goods [4]. This is because capital and energy intensity is higher in the former sectors (mining, industry), which is also at the root of higher productivity. As currency depreciation encourages the production of tradable goods by increasing their relative price, it has a positive effect on a country’s average carbon intensity.

However, this difference between the two sectors tends to diminish, or even disappear, as the country develops.

This African specificity is explained by the importance of the production and export of intermediate industrial goods, and by the tendency of industrialized countries to relocate their most polluting production to Africa. [5] And so, the search for competitiveness through exchange rate depreciation could have the effect of reinforcing the specialization of African exports in intermediate industrial goods, whose production is highly CO2 emitting, whereas the objective should be the production of exportable manufactured goods or services. The latter can be stimulated by fiscal policy, the orientation of financing and an improved business climate.

• Exchange rate and deforestation

                The best contribution developing countries can make to mitigating global change is certainly to preserve forests. Forests play a major role in maintaining the balance of ecosystems. However, despite the efforts made in recent years to protect the environment and restore forests, deforestation continues apace, even if losses have slowed over the past two decades. Deforestation is rife in Africa. Every year, the continent loses almost four million hectares of forest.

It is therefore important to consider the potential responsibility of exchange rate policies in forest degradation.

                 Several studies have analyzed the causes of deforestation. However, the role of the price of wood has been little studied, notably because it does not lend itself well to microeconomic analysis [1].  

Their theoretical and empirical model is based on the choice of owners between conserving the forest or clearing it for agricultural use. This choice depends, all things being equal, on the preference for the present, since wood production implies a long-term investment (forest) whereas agriculture has a faster yield, to which in the short run the sale of wood is added. Preference for the present is considered to be stronger in poor countries than in rich ones, which constitutes a bias in favor of deforestation in poor countries [9].

                  Faced with a depreciation of the currency and thus an increase in the relative price of wood, the owner can either consider that his capital is appreciating and that it is profitable to increase it, which is in favor of reforestation, that timber harvesting is particularly profitable, and it’s time to cut wood. Given the preference of poor countries for the present and the transitory nature of their actual depreciations, it can be expected that the latter behavior will be dominant in these countries, unlike developed countries. This negative effect of real depreciation is accentuated by the poor quality of institutions, which is typical of many developing countries[9].

                   It should be noted that, in developing countries in particular, the real exchange rate is highly volatile. As an example, in Madagascar, between January 2008 and January 2023, the real exchange rate was tendentially stable, but with short-term instability (according to the IMF report).

                    A good illustration of this phenomenon is the situation that emerged after the massive devaluation of the CFA franc in 1994, which was followed by deforestation for the export of logs or local manufacture of wooden furniture in the countries of the Franc Zone.

 

The independent variable is the real effective exchange rate[1]. It comes from the International Monetary Fund. It measures the relative value of one currency against another, considering changes in domestic and foreign prices.

3.2 Methodology

This article attempts to estimate the parameters of the following econometric specifications:

4. Empirical Results

In this section, we present the results and sensitivity test for the sub-index of climate change.

4.1 Results

The overall baseline results are presented in Table 2 below. First, we include in all regressions the characteristics (real effective exchange rate, GDP per capita, Agricultural production, Natural resources, Inflation) that ([2];[5];[11]) identify as powerful climate change determinants and patterns. We assume is that the real exchange rate can improve countries’ climate change.

Exchange rate policy can explain the environmental policy gap between countries. The 95 confidence intervals show the positive impact of the real exchange rate.  The countries of sub-Saharan Africa are lagging behind in terms of climate change compared to other regions of the world.

4.2 Sensitivity to the sub-index of Climate change

The estimation results show a positive and significant correlation between the exchange rate and climate change more precisely  (1) Per Capita Greenhouse Gas Emissions, (2) Deforestation and (3) Climate finance ([1];[12])

 

• African and non-African countries result.

 In this section, we try to consider the peculiarity of African economies. As shown in table 4 below, these African countries have the lowest scores in terms of real exchange rate and climate change compared with the rest of the world.

The results of table 4 show that the real exchange rate is a key element for climate change in Asia, America and Europe (columns 4, 5, 6, 7, 8, 9). While in Africa, its impact is negative and modest or even insignificant (columns 1 and 3). But these results only represent a correlation relationship, as they do not specify the sources of exogenous variation. This raises a high risk of endogeneity. We therefore correct this problem in the next section.

• Dealing with Endogeneity

The OLS data do no enable us to ascertain the exact impact of the real exchange rate on climate change. To obtain a causal relationship between the two variables, exogenous sources of variation are imperative. Exogenous source of variation is essential to establish a causal link between the two variables. Consequently, not all possible source of endogeneity has been addressed, which may indicate that the previously reported results are merely correlational. There are three prevailing factors of endogeneity in the literature. It may result from measurement errors in the variables, omission of important variables from the model and simultaneity bias [7]. Measurement errors on variables are usually due to good “causes” or “sources”. Omitted determinants of the dependent variables in an econometric model would show up in the disturbance term. Simultaneity bias, in contrast, is the result of the causal relationship between one (or more) of the explanatory variables. These covariates are endogenous and they are mutually dependent on one another.

In our case, the first issue with the findings produced from estimating the OLS in equation (1) is the potential bias associated with omitted variables. To tackle this challenge, we need to include several crucial climate change drivers in the regression model. This is because it is impossible to tell whether the real exchange rate is orthogonal to the disturbance term. As a result, we employ the [10] technique to address the issue of unobserved variables [6]. This method allows you to compare the R-squared values achieved when estimating a model with a comprehensive control estimator to a model with a limited set of control variables. It also allows us to ensure that the coefficients are stable.

The unobservable selection bias analysis uses (ϑ) and (α*), which are proportionality and bias-adjusted coefficients. As a result, our technique estimates adjusted bias. Our ‘α’ represents the impact of the actual exchange rate on climate change, considering both observed and unobserved confounders in baseline data. The statistical tests for this estimation are built around the value of Rmax. This variable indicates the R-squared value, which measures the amount of variation in climate change between nations while accounting for all relevant controls [10]. The (α*) coefficient of real exchange rate is relevant when the interval does not include zero. In this scenario, selection of unobservable determines the link between the actual exchange rate and climate change.

Previous research have identified an ideal source of exogenous variation, and there are numerous instruments for sustaining monetary stability that can be used to rectify this endogeneity problem. Except for Chile, Mexico, and Somalia, who have embraced free floating, developing countries pick between a parity (fixed exchange rate) or a controlled floating system for their currency. In both systems, the government determines the currency rate, either by changing the parity (sometimes in accordance with a pre-established regulation or crawling peg) or by varying the Central Bank’s involvement in the foreign exchange market [3].

The implementation of this policy has two possible objectives: to use parity as a currency anchor and a way of sustaining monetary stability, or to define a real target (or real effective exchange rate) to maintain the economy’s competitiveness.

Table 5 shows the findings of the second stage IV-2SLS calculations. The Kleibergen-Paap Wald rk F statistic is significant at 1%, demonstrating the instruments’ usefulness. So, there is no issue with weak identification. The Kleibergen-Paap LM rk statistic’s under-identification test has a good P-value. The Anderson-Rubin P-value test is significant at 1%, showing that our findings are reliable for identification. Overall, this estimate contains no tiny instrument bias. In this situation, we can confirm our theory that the real exchange rate has a negative impact on Africa by dramatically lowering climate change. In the rest of the globe, however, empirical study reveals that the actual exchange rate significantly.

 6. Discussions and conclusions

This article examines whether exchange rate policies explain the differences in change between Africa and other regions of the world. After presenting a summary of the scientific literature that synthesizes the different exchange rate policies used as an operational framework for empirical studies on the issue. We test the hypothesis that the type of exchange rate policy affects global change, and the hypothesis that, unlike the rest of the world, exchange rate policy in African countries negatively affects global change.

The results obtained from a sample of 117 countries over the study period from 2003 to 2023 show a negative impact of exchange rate policy on global change in African countries and a positive in the rest of the world. These results highlight the low level of their ability to adapt and mitigate climate risks in African countries. Although there has been some monetary stability in recent years in African countries, particularly in sub-Saharan Africa, it remains fragile relative to developed countries.

To avoid countries being forced to devalue their currencies in the face of a climate shock, developing countries need to maintain a relatively high stock of external reserves in stable periods, probably higher than the usual standard equivalent to three months’ imports.

Over and above the optimal amount of reserves, the question arises as to whether the choice of assets making up these reserves should include green securities that explicitly finance pro-climate actions. Central banks are very concerned about the internal financing of economies (through the choice of discounted securities), and this concern, while legitimate, does not apply well to the composition of reserves. As reserves must be liquid by nature, they take the form of treasury bills or deposits in major foreign central banks, and can only be marginally made up of green bonds. Furthermore, the choice of partners must be guided by their reliability and the convertibility of their currency.

Declarations

Writing – original draft: EKA Fred

Funding acquisition:  EKA Fred

Resources :  EKA Fred

References

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