External Debt-Driven Unemployment, Exchange Rate Volatility, And Interest Rates: Hysteresis Effect Evidence from the Burundian Economy
DOI:
https://doi.org/10.59413/ajocs/v7.i4.20Keywords:
unemployment, external debt, exchange rate volatility, interest rate, hysteresis effect, marginal effect, Vector Error Correction Model (VECM), Burundian EconomyAbstract
This study examines the determinants of unemployment in Burundi through a vector error correction model (VECM) incorporating the unemployment rate, exchange rate volatility, lending interest rate, their interaction term, and the stock of external debt over the period 1991-2025. The results reveal that external debt is the dominant structural determinant of long-term unemployment (t = -8.217), with a speed of adjustment significantly lower than that of the debt (-0.020 < 2.298), generating a hysteresis effect confirmed by the historical episodes of 2004, 2009, and 2015. Moreover, the analysis of marginal effects shows that the impact of exchange rate volatility on unemployment is not fixed but is conditioned by the prevailing interest rate regime, shifting from a positive and significant effect at low rates to a negative effect beyond an estimated critical threshold of 10.02%. These results highlight a dual hysteresis dynamic— driven by external debt and modulated by the exchange rate-interest rate interaction—and call for strengthened coordination between debt management, exchange rate policy, and monetary policy to sustainably mitigate unemployment in the Burundian economy.
Downloads
References
Aguirre, Á., & Calderón , C. (2005). Real Exchange Rate Misalignments and Economic Performance. Central Bank of Chile(315), 1-56.
Aizenman, J., Chinn, D. M., & Ito, H. (2015, April). Monetary policy spillovers and the trilemma in the new normal: periphery country sensitivity to core country conditions. NBER Working Paper Series, pp. 1-51. Récupéré sur http://www.nber.org/papers/w21128 DOI: https://doi.org/10.3386/w21128
Arize, C. A., Osang, T., & Slottje, J. D. (2000). Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDC's. Journal of Business & Economic Statistics, 18(1), 10-17. https://doi.org/10.2307/1392132 DOI: https://doi.org/10.1080/07350015.2000.10524843
Bahmani-Oskooee, M., & Gelan, A. (2018). Exchange-rate Volatility and International Trade Performance: Evidence from 12 African Countries. Economic Analysis Policy, 14-21. https://doi.org/10.1016/j.eap.2017.12.005 DOI: https://doi.org/10.1016/j.eap.2017.12.005
Bank, W. (2024). World Development Indicators. World Bank Group.
Belke, H. A., & Gros, D. (2001). Real Impacts of Intra-European Exchange Rate Variability: a Case For EMU? Open Economies Review, 12(2), 231-264. https://doi.org/10.1023/A:1011112105352 DOI: https://doi.org/10.1023/A:1011112105352
Berg, A., Laxton , D., & Karam, P. D. (2006, March 01). A Practical Model-Based Approach to Monetary Policy Analysis-Overvieww. IMF Working Paper, 2006(080), pp. 1-43. https://doi.org/10.5089/9781451863406.001 DOI: https://doi.org/10.5089/9781451863406.001
Bernanke, S. B., & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. Journal of Economic Perspectives, 9(4), 27-48. https://doi.org/10.1257/jep.9.4.27 DOI: https://doi.org/10.1257/jep.9.4.27
Bleaney, M., & Greenaway, D. (2001). The impact of terms of trade and real exchange rate volatility on investmentand growth in sub-Saharan Africa. Journal of Development Economics, 65(2), 491-500. https://doi.org/10.1016/S0304-3878(01)00147-X DOI: https://doi.org/10.1016/S0304-3878(01)00147-X
Brambor, T., Clark, W. R., & Golder, M. (2006). Understanding Interaction Models: Improving Empirical Analyses. Political Analysis, 14, 63-82. https://doi.org/doi:10.1093/pan/mpi014 DOI: https://doi.org/10.1093/pan/mpi014
BRB. (2023). Rapport annuel de la Baqnue Centrale de la République du Burundi: Exercice 2023. BRB.
Calvo, G. A., & Reinhart, C. M. (1999, November). Fear of Floating. NBER Working Paper(7993), pp. 1-31. https://doi.org/10.3386/w7993
Chinn, D. M., & Meredith, G. (2005, January). Testing Uncovered Interest RateParity at Short and Long Horizons during the Post-Bretton Woods Era. NBER Working Paper Series(11077), pp. 1-28. https://doi.org/10.3386/w11077 DOI: https://doi.org/10.3386/w11077
Chinn, D. M., & Zhang, Y. (2015, May). Uncovered Interest Parity and Monetary Policy Near and Far from the Zero Lower Bound. NBER working Paper Series, pp. 1-37. https://doi.org/10.3386/w21159 DOI: https://doi.org/10.3386/w21159
Christiano, J. L., Eichenbaum, M., & Evans, L. C. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. Journal of Political Economy, 113(1), 1-45. DOI: https://doi.org/10.1086/426038
Clarida, R., Galí, J., & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37(4), 1661-1707. https://doi.org/10.1257/jel.37.4.1661 DOI: https://doi.org/10.1257/jel.37.4.1661
Edwards, S. (1996, October 31). The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes. NBER Working Paper Series(w5756), pp. 1-26. Récupéré sur https://www.nber.org DOI: https://doi.org/10.3386/w5756
Engel, C. (1996). The forward discount anomaly and the risk premium: A survey of recent evidence. Journal of Empirical Finance, 3(2), 123-192. DOI: https://doi.org/10.1016/0927-5398(95)00016-X
Engel, C. (2016). Exchange Rates, Interest Rates, and the Risk Premium. American Economic Review, 106(2), 436-474. https://doi.org/10.1257/aer.20121365 DOI: https://doi.org/10.1257/aer.20121365
Engel, C., Kazakova, K., Wang, M., & Xiang, N. (2022). A reconsideration of the failure of uncovered interest parity for the U.S. dollar. Journal of International Economics, 136(103602), 1-35. https://doi.org/10.1016/j.jinteco.2022.103602 DOI: https://doi.org/10.1016/j.jinteco.2022.103602
Engle, F. R., & Granger, W. C. (1987). Co-integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2), 251-276. DOI: https://doi.org/10.2307/1913236
Frenkel, A. J., & Razin, A. (1986). Fiscal Policies in the World Economy. The Journal of Political Economy, 96(3), 564-594. Récupéré sur https://www.journals.uchicago.edu DOI: https://doi.org/10.1086/261390
Gala, P., & Lucinda, R. C. (2006). Exchange rate misalignment and growth. Brazilian Journal of Political Economy, 26(1), 3-20.
Hausmann, R., Panizza, U., & Stein, E. (2001). Why do countries float the way they float? Journal of Development Economics, 66(2), 387-414. https://doi.org/10.1016/S0304-3878(01)00168-7 DOI: https://doi.org/10.1016/S0304-3878(01)00168-7
IMF. (2023). Regional Economic Outlook: Sub-Saharan Africa. IMF.
Johansen, S. (1987). Statistical Analysis of Cointegration Vectors. Institute of Mathematical Statistics, 1-32.
Johansen, S. (1989). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Institute of Mathematical Statistics, 1-48.
Juana, B., & Wolpe, H. (2006). Développement et consolidation de la paix: Le cas du Burundi. Groupe de la Banque Mondiale.
Meredith, G., & Chinn, D. M. (1998, November). Long-Horizon Uncovered Interest Rate Parity. NBER Working Paper Series(6797), pp. 1-34. https://doi.org/10.3386/w6797 DOI: https://doi.org/10.3386/w6797
Mishra, P., Montiel, J. P., & Spilimbergo, A. (2010, October 01). Monetary Transmission in Low Income Countries. IMF Working Papers, 2010(223), pp. 1-42. https://doi.org/10.5089/9781455208883.001 DOI: https://doi.org/10.5089/9781455208883.001
Naib, W., & Guati, R. (2022). L'impact de la volatilité du taux de change sur la performance financière des entreprises: Une revue de la littérature empirique. African Scientifique Journal, 03(15), 713-725. https://doi.org/10.5281/zenodo.7564699
Ndung'u, N. S. (1999). Monetary and exchange rate policy in Kenya. AERC Research Paper(94).
Obstfeld, M., & Rogoff, K. (1995). Exchange Rate Redux. The Journal of Political Economy, 103(3), 624-660. Récupéré sur https://www.journals.uchicago.edu DOI: https://doi.org/10.1086/261997
Reinhart, C., Rogoff, K., & Savastano, A. M. (2003). Debt Intolerance. Brookings Papers on Economic Activity, 34(1), 1-74. Récupéré sur https://www.brookings.edu DOI: https://doi.org/10.1353/eca.2003.0018
Rodrik, D. (2008). The Real Exchange Rate and Economic Growth. Brookings Papers on Economic Activity, 365-439. DOI: https://doi.org/10.1353/eca.0.0020
Downloads
Published
Issue
Section
License
Copyright (c) 2026 Dr. Emmanuel NIZIGIYIMANA, Dr. Etienne BUREGEYA, Prof. Jean de Dieu NDIKUMANA (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
