Productivity-Enhancing Reforms, Private Capital Inflows, and Real Interest Rates in Africa

Abstract:     
The rise in economic growth in some countries of Africa over past two decades, powered mainly by productivity boom, has been associated with large private capital inflows despite poor integration of the African countries with the world capital markets. While these countries lack access to world capital markets, they are nonetheless highly dollarized and allowing for this fact can explain large private capital inflows and other stylized macroeconomic facts associated with the productivity-enhancing reforms in Africa. With a number of African economies poised to reap gains in productivity, as they return to stable and sound political and economic environment, the paper suggests the framework that can be used to understand the macroeconomic implications of and suggest appropriate policy responses to such gains in productivity.

Keywords: Africa, currency substitution, productivity-enhancing reforms, capital flows, inflation, overshooting, real interest rate

JEL Classifications: F32, F41, O55

Working Paper Series