ABSTRACT

The 2009 crisis brought into sharper focus the need to balance fiscal measures against exchange rate adjustment as a monetary policy tool for economic expansion. The structure of the African economies poses additional threats to the sustainability of successful monetary unions. Macroeconomic stabilisation generally requires dual policy measures. In the absence of these measures, it is virtually impractical to expect meaningful economic recovery and price stability. The chapter discusses the relationship between the real fed funds rate (RFFR) and the trade-weighted dollar. The trade-weighted exchange rate takes into consideration the impact of trade on exchange rates and vice-versa. The essence is to weight the dollar according to the volume of trade with the countries that are considered in the index. Evidently, increases in the real federal funds rate correspond to increases in the trade-weighted US dollar. Implicitly, and to a certain extent, the weighted exchange rate and the RFFR tend to move in the same direction.