Exchange Rate Devaluation, Interest Rate Volatility, and Investment Growth: ECOWAS Evidence

Abstract

There have been concerns raised over the low-capacity utilisation of resources in developing countries. Countries within this cadre tend to have high untapped areas of investment despite existing potentials and the open economy operated. Certain macroeconomic variables and shocks that arise from variance over specified periods may be responsible for changes in investment values. The study aimed at determining effect of exchange rate devaluation and interest rate volatility on investment growth in selected ECOWAS nations. The study made use of secondary data from 1991 to 2020 which were obtained from publications of the United Nations, IMF and World Bank. Panel Unit root and panel co-integration tests were conducted to ascertain stationarity of variables and existence of long-term relationship between variables respectively. The data were found to be stationary at first differencing at the most. Long term relationship was found among study variables. We estimated the Structural Vector Auto Regressive (SVAR) model in order to identify the influence of policy shocks in exchange rate devaluation and interest rate volatility. The SVAR results revealed that investment growth responds to shocks from exchange rate devaluation negatively at first, but stabilises over time. For interest rate volatility, investment rate continues to grow but at a diminishing rate over the periods. Investment growth was also found to react largely to its internal shocks from its values in lagged periods. The study recommended among others, that devaluation of currency should be a last resort to salvaging the economy to reduce the inflationary pressure and at least, sustain current living standards.