External Shocks and Economic Dynamics: The Case of African Countries

A number of African economies have highly concentrated export and import sectors. Moreover, their export revenues are highly unstable due to recurrent and sharp variations in the prices of main export goods. This paper examines the role of external shocks, which are represented by fluctuations in the prices of main export and import items, in explaining economic fluctuations in African economies. We construct a stochastic, dynamic, multi-sector small open economy model calibrated to reflect structural characteristics of a typical African economy. Our results suggest that external shocks account for a significant fraction of economic fluctuations in African economies. In particular, more than 45 percent of aggregate output fluctuations and almost 78 percent of investment fluctuations are explained by the external shocks. We also find that the propagation of macroeconomic fluctuations caused by the external shocks to be substantially different than that induced by domestic productivity shocks. While positive domestic productivity shocks induce short-lived economic expansions, adverse external shocks result in prolonged recessions.