Real Exchange Rate Volatility and Export Performance in the West African Monetary Zone (WAMZ)

Abstract

The aim of this paper is to empirically investigate the impact of exchange-rate volatility on export performance in the WAMZ (the WAMZ countries include The Gambia, Ghana, Guinea, Liberia, Nigeria and Sierra Leone) countries using quarterly data for the period 1990–2010. The paper utilizes the Engel-Granger Dynamic OLS (DOLS) estimation technique to establish a cointegrating relationship among the model variables, while Generalized Autoregressive Conditional Heteroskedasticity (GARCH) approach is employed in modelling the real exchange rate volatility. In conformity with theoretical considerations, the results indicate that exchange-rate volatility exerts a significant negative effect upon export in Liberia, Nigeria and Sierra Leone, while a positive relationship is established in the case of The Gambia. However its impact on Ghana and Guinea is found to be insignificant during the review period. While real effective exchange rate impacts export performance negatively in the The Gambia, Ghana and Nigeria, its impact in Guinea and Liberia is positive. In Sierra Leone, the relationship between real effective exchange rate and export performance is positive in the long run but negative in the short run. A key lesson arising from this study is that trade policy actions aimed at export promotion are likely to generate uncertain results, at best, if policymakers in the WAMZ countries ignore the stability as well as the level of the real exchange rate. Thus, to improve export performance in the WAMZ, policies which will ensure stability of the real exchange rate should be pursued.