Do inflation, growth, and exchange rate converge? Some North African evidence

Abstract This paper studies the inflation, growth, and real exchange rate convergence in six North African countries for the period 1980-2024. Employing a rich panel econometric methodology which includes first and second-generation unit root tests, Phillips and Sul club convergence analysis, multivariate stability tests, panel VAR, and Dumitrescu–Hurlin causality, the paper analyzes stochastic convergence and dynamic interdependence in macroeconomic variables. The findings show that all series are I(1); there is no evidence of global deterministic convergence. In contrast, after the adjustment for cross-sectional dependence, inflation and exchange rates weakly converge stochastically, but economic growth is mainly non-convergent, indicating structural persistent heterogeneity across countries. A two-group club convergence pattern emerges from the analysis: a core cluster composed of Morocco, Tunisia, Algeria, and Libya, and a periphery comprised of Egypt and Mauritania. In addition, the panel VAR results support strong dynamic interactions where inflation has a positive and significant effect on exchange rate changes as well as on economic growth, but with a negative sign, and exchange rate changes also respond to inflation dynamics. These results suggest that North African convergence is rather a partial and heterogeneous convergence and not a convergence in all the countries. Policy implications are complementary inflation targeting, exchange rate management, and structural reforms consistent with greater regional macroeconomic convergence to support deeper economic integration. JEL Classification: C31, E32, E58, F31, F43