Exchange Rate Volatility and Growth Dynamics: Evidence from Selected Sub-Saharan African Countries

Abstract

The objective of this paper is to examine the relationship between the volatility of real exchange rate of own country and the G-3 countries (United States of America, Japan, and Germany/ or Euro zone) and the economic growth in developing countries. We draw a sample of African economies namely Nigeria, Kenya, Ghana, Malawi, Zambia and Mali and utilize quarterly data from the period 1980 -2013 which is divided into two periods - 1980- 2001 and 2002 – 2013. We apply the residual based cointegration test of Kao and Johansen –Fisher combined cointegration test to detect the long run relationships among the variables. Finally, we employ the Fully Modified Ordinary Least Squares of Philips and Hansen to estimate the long run coefficients of the model. The main results are: the long run relationships among the variables are strongly stable in the period 1980 – 2001 but ambiguous in the period 2002 –2013.  The financial system is underdeveloped and it negatively affects the economic growth in the selected African Countries. The own country’s real exchange rate volatility tends to depress the economic growth in both periods. The G-3 countries’ real exchange rate volatilities have mix results. While the Yen/Dollar and the Deutsche mark/Dollar improve economic growth, the Yen/Deutsche does not have any appreciable effect on economic growth in the developing African countries in the period 1980 - 2001. However, the period 2002 – 2013, the G-3 countries’ real exchange rate volatility tends to depress the economic growth in the developing African countries. These findings suggest that greater stability in international exchange rate system and lower G-3 currency volatility are desirable to promote higher growth in developing countries and which might reduce the possibility of occurrence of exchange rate crises.