Does the Volatility of Exchange Rate Affect the Economic Performance of Countries in the West African Monetary Zone? A Case of Nigeria and Ghana

Abstract

It has been recognized that sustaining a relatively stable exchange rate is important in boosting economic growth. Volatility of exchange rate induces uncertainty and risk in investment decisions with subverting impact on the macroeconomic performance. This study examined whether the volatility of exchange rate has implications for the economic performance of the countries in the West African Monetary Zone. Nigeria and Ghana were chosen as case studies for the period from 1980 to 2013. Exchange rate variability was measured using the GARCH approach. The empirical results confirm that exchange rate volatility have a significant negative effect on economic growth. This implies that policy that will enhance stability of the exchange rate will promote growth therefore the WAMZ countries must prioritize the enhancement and promotion of a stable exchange rate and interest rate policy that that will encourage investors to invest in sectors if steady economic growth is to be attained. Also adequate steps must be put in place for the fine-tuning of exchange rate dynamics which otherwise can frustrate the impeding monetary integration by WAMZ members.