TITLE:
An Empirical Assessment of Exchange Rate Depreciation and Currency Substitution in Sierra Leone
AUTHORS:
Alhassan Kallon, Alhaji Sorie Ibrahim Barrie
KEYWORDS:
Exchange Rate Depreciation, Currency Substitution, Gross International Reserves, Consumer Price Index, Sierra Leone
JOURNAL NAME:
Modern Economy,
Vol.14 No.12,
December
29,
2023
ABSTRACT: This paper investigates the dynamics of
exchange rate depreciation and currency substitution in Sierra Leone, focusing
on the period between 2020M1 to 2023M5, which
is marked by the COVID-19 pandemic, global supply chain disruptions,
elevated inflation, the Russia-Ukraine war and interest rate hikes. Currency substitution, defined as the substitution
of a domestic currency with a foreign one due to the inefficacy of the
former, has been associated with economic instability, adversely impacting
living conditions, financial system development,
and monetary policy autonomy. The paper employs the ARDL modeling and bounds testing, to analyze variables
such as Broad Currency Substitution
(BCS), Narrow Currency Substitution (NCS), Nominal Exchange Rate Depreciation (NERD), Gross International Reserves
(GIRs), and Consumer Price Index
(CPI). The ARDL estimates, which capture both short-run and long-run
relationships, highlighted the importance of exchange rate depreciation, gross international reserves, and the consumer
price index in influencing currency
substitution. The results revealed valuable insights for policymakers in
understanding the dynamics of currency substitution in the context of exchange rate depreciation. The study’s policy
implications emphasize the importance
of exchange rate stability, as depreciation emerged as a significant driver of currency substitution. Policymakers are
also encouraged to implement measures to build a strong international
reserves buffer, control inflation and combat the practice of currency
substitution.