Effects of Exchange Rate Volatility on Economic Growth: Evidence from West African Monetary Zone

Pabai Fofanah

doi:10.18535/ijsrm/v9i1.sh02

Abstract

Abstract: This study examined the effects of exchange rate volatility on economic growth in four WAMZ countries. The study uses the pooled ordinary least squares, fixed effects and random effects models, and obtains a robust standard error estimate of the model by applying xtreg, cluster()fe. The empirical analysis shows that the effects of exchange rate volatility on economic growth is insignificant. The results also show a positive correlation between exports and economic growth. This implies that policies aimed at increasing exports through an appropriate exchange rate may be beneficial countries. In addition, the analysis also shows a positive and significant link between imports and economic growth rates. Therefore, this confirms that the countries actually benefit from imports resulting from the competitive pressure generated by the import of consumer goods and professional knowledge, and also from the transfer of technology embodied in the import of goods by producers. Hence, the policy of removing import barriers will benefit the countries. In addition, the results show that there is a positive correlation between the nominal exchange rate and economic growth rate. Therefore, it shows that the nominal exchange rate depreciation policy can play an important role in improving the economic growth of the countries. However, the research results show that there is an inverse relationship between the real exchange rate and economic growth. Considering the importance of the real exchange rate, this study suggests the introduction of a common currency in the WAMZ to reduce the negative effects of the real exchange rate on economic growth.

Highlights

This article focuses on the impact of exchange rate volatility1 on the economic growth (GDP) of certain countries (The Gambia, Ghana, Nigeria, and Sierra Leone) in the West African Monetary Zone WAMZ2
Definition of the variables and expected signs The subscript i represents the cross-sectional dimension, t denotes the time-series dimension, U is an error term, LnX is the log of the total value of exports, LnM is the log of the total value of imports, Trade balance (TB) is the trade balance, LnGDP is the log of the gross domestic product, LnRER Is the logarithm of the real exchange rate, measured by {nominal exchange rate (NER) * foreign commodity price (Pf)/domestic commodity price (Pd)}, Inflation rates (INF) is the inflation rate and LnVOL is the exchange rate volatility proxy generated from the monthly real effective exchange rates
5: Conclusion and Policy Recommendations This study examines the impact of exchange rate volatility on economic growth, focusing on four WAMZ countries

Summary

Introduction

This article focuses on the impact of exchange rate volatility1 on the economic growth (GDP) of certain countries (The Gambia, Ghana, Nigeria, and Sierra Leone) in the West African Monetary Zone WAMZ2. If the economy is operating at less than full employment, domestic currency devaluation/depreciation will increase consumption of domestic goods and assets and reduce consumption of foreign goods and assets, national income or output will increase more than the national expenditure, this event will subsequently improve the balance of payment and growth rate.

Results

Conclusion